Article / 10 August 2015 at 14:00 GMT

Greece edges towards a third bailout

Managing Partner / Spotlight Group
United Kingdom
  • Greece comes a step closer to a new creditor deal
  • Eurozone creditors remain highly sceptical of Syriza
  • Rallies in Greek assets likely represent selling opportunities

Athens
More Eurozone capital is headed for Athens, but there remain serious questions about the viability of any austerity plan under Syriza. Photo: iStock 

By Stephen Pope

Just as tourists are heading south to the sun-kissed beaches of the Aegean so too, it appears, is a further package of euros. The Hellenic Republic is now a step closer to achieving a new agreement with its creditors – one worth €86 billion.

The creditor institutions (the European Central Bank, International Monetary Fund, European Commission, and European Stability Mechanism) made progress during marathon talks that concluded August 9.

The indebted nation and its European creditors have agreed to once again deny the realities of sound money and economics. The bailout programme has been based on a series of “tests and traps”. Unfortunately, Greece has managed to fail every test on economic reform and financial discipline that it has been given; simultaneously, its creditors have allowed themselves to be trapped into handing over increasing amounts of credit.

The German and Greek media have reported that almost 30 pages of far-reaching reforms have been agreed upon, but let us be honest: Greece is so far gone from a financial standpoint that finance minister Euclid Tsakalotos would agree to anything. 

As for the creditors… you fools! Greece will agree to all manner of rigourous reforms, but can we seriously expect the Syriza-led government to deliver the programme? I think not.

Such is the desire of Greece to stay in the "Club d'Euro" – and the bloc members to block the exit – that all tangible measures of reality are suppressed and instead a fantasy more suited to Euro Disney than the Eurozone is allowed to take flight.

Ten days of urgency

The Greek government is seeking to conclude talks on a rescue programme tomorrow so as to allow sufficient time for national parliaments to debate the deal and allow the funds to be disbursed ahead of the payment due the ECB on August 20.

An agreement will allow the Greek parliament to pass any new required reforms in the middle of the week and so pave the way for a meeting of the Eurogroup at the end of the week. Time is of the essence, as Greece requires an urgent liquidity injection to establish a buffer for its banks and to make loan payments.

Over the next 10 days, the key stages are as follows: 

August 11

The Greek government should finalise talks with European officials in Athens.  

August 14

A possible meeting of Eurogroup to review the deal; this paves the way for a Memorandum of Understanding setting out the terms of the bailout in detail.

August 18

Greek parliament to vote on bailout package.  

August 20

Greece has to repay €3.5 Billion to the ECB. Were this payment to be missed, the central bank would have no choice but to withdraw its support of the Greek banking system.

Greece
Any port in a storm? Greece has accepted the restrictions of its creditors, 
but their successful implementation has yet to be seen. Photo: iStock

Is Greece getting back to normal?

Greece and its creditors have still to determine precisely how much money is required for the third bailout in five years. Similarly, the detail of what the creditors expect back in return has not been clarified. 

Finnish foreign minister Timo Soini said over the weekend that his government is ready to discuss a new aid plan for Greece but that “we should admit that this isn’t going to work.”

Germany has its doubts as well, as just last week conservative lawmaker Hans Michelbach suggested that there should be no further deal with Greece as he could not believe the terms and conditions attached to new financing would be adhered to.

Even with a new bailout deal, Greece is far from enjoying a quick return to a normalised level of operations. Capital controls, imposed when the ECB froze emergency liquidity assistance for the banks, are unlikely to be lifted for some time. So while the banks are open again, cash withdrawals will be limited to €420 per week.

But what is normal? Greece has not been able to operate at a normal level since 2009 as the financial crisis hit Greece and its banks hard. The country's jobless rate is above 25% and youth unemployment is as high as 50%.
Greece Source: IMF, BBC

The chart shows just how deep the recession Greece has been and that the imposition of extreme austerity onto a nation that was already in a tailspin has been a disaster. 

In comparison to the Great Depression of the US in the 1930s, the recovery in Greece is 36 months slower to show an improvement; 18 months slower in reaching the same level and shows nothing like the same liftoff trajectory. 

Compared to the European Union as a whole, it is as if Greece had no connection to Europe whatsoever.

I will stand by the position that I have held since 2009 that it would have been better to have Greece go in 2009/10. I fail to see how the economy will recover as I do not believe Syriza has the will or desire to implement hardline austerity and reform. I expect the economic malaise to continue and that a new general election will be called within 12 months.

A Grexit is still very much on the table and any rally in the Athens General Stock Exchange or Greek Government bond prices represents a new selling opportunity. Holding Greek debt is only for those with fire proof gloves as if one holds these assets for too long, one will be burned.

There is a reason why the prices are low and the yield is high… and “junk” is the mildest expression one can use.

Greece
In the current environment, "Greek ruins" encompasses a lot more 
than the odd temple, amphora or Corinthian capital. Photo: iStock

— Edited by Michael McKenna

Stephen Pope is managing partner at Spotlight Ideas

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