Marc Chandler, Global Head of Currency Strategy at BBH, suggests that developments in Italy and the growing estrangement between the US and Europe, not just over trade, but Russia and Iran as well, are overshadowing the conclusion of the third assistance program for Greece.
Key Quotes
“The end like the beginning is a bit rolling, in the sense that the formal program ends this month, but the final payment is expected in August. And even, then, it will likely come under close scrutiny to ensure that it does not backtrack on the reforms.”
“Even at this late date, the pivotal issue of the sustainability of Greece’s debt has not been resolved. The macro-picture has improved, and the fiscal and current account imbalances have been addressed or are being addressed. The round of pension cuts that are to be implemented next year sparked a general strike and protests against the government in May.”
“The IMF argues that Greece’s debt is not sustainable. Some relief is necessary, but the IMF says it won’t be on its accounts, which pushes more of the burden on the other official creditors, the ECB, and EFSF/ESM. And they balk.”
“This, in turn, aggravates a delicate situation. As is well appreciated now, the bulk of the funds Greece got during its three aid programs allowed Greece to service its debt, the vast majority of which is in official hands. When the private sector was forced to take a haircut on Greek debt, the official sector did not. This is where the fundamental flaw lies. The debt restructuring was not permitted to be sufficient to put Greece on stable footing.”
“If Greece is going to service these debts now without relying on such “aid,” it needs to access the capital markets. Its access to the capital markets is fragile. If there is no meaningful easing of Greece’s debt burden, it is not clear that the private sector, outside of Greek banks, pensions, and financial institutions, will want to commit to a situation that the IMF argued is not sustainable.”
“The ECB and the Greek Central Bank want something like a precautionary line of credit when the official program ends, but the Greek government sees it as too close to a fourth aid program.”
“By many measures, the Greek economy has turned a corner. Growth in Q1 was 2.3% at an annualized rate, the best in a decade, and the fifth consecutive quarter of growth.”
“There is reportedly discussion over the possibility of providing some relief by linking interest rate to Greece’s GDP. The stronger the growth, the higher the interest rate in some fashion.”
“If one thinks that redenomination risk is minimal, are Greek 10-year bonds, presently yielding 4.5% attractive? We suspect that yields are going to trend higher and would not be surprised to see something closer to 6% over the next 12-18 months.”
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