What Next for Greece After Another Week of Deadlock?
Staff Writer, CNBC.com
Yet another week has gone by without a final resolution of the terms of Greece’s second bailout deal within two years.
Economists and analysts are increasingly examining worse-case scenarios for the heavily indebted Mediterranean country, which announced Thursday that it should be able to reach agreement with euro zone finance ministers over a key debt swap scheme with private bondholders on Monday.
If Greece leaves the euro, the single currency would sink by 10 percent against the dollar, and volatility in stocks would rise by around 25 percent, according to risk management company SunGard APT.
Portugal would not be long after Greece, and its departure would further affect the euro, according to Laurence Wormald, head of research for SunGard APT.
“Although markets have had a little bit of a rally, I don’t think fundamentals have changed, and probabilities are still driven by politics,” he told CNBC.com. He believes a lot of the risks of a Greek exit are already priced into the market.
While euro zone politicians have said that they want to keep Greece within the euro, after the European Central Bank’s long-term refinancing operation helped prop up the banking system many analysts believe a Greek exit would be less critical than before the operation.
“So long as the central bank is on the case, these debt problems will not explode,” Erik Neilsen, global chief economist at UniCredit, told CNBC.
“If Greece stays, ultimately the rest of Europe’s public sector will have to do a debt restructuring. The debt numbers are too high.”
More Spending Cuts
Further divisions between Germany, which is leading the euro zone’s side of negotiations, and Greece, have emerged this week.
“There’s not one German or Greek opinion. This comes down to the social fabric in Greece, and I’m not a social scientist but it doesn’t look good,” Neilsen said.
One of the key issues causing social problems in Greece is the required cuts to public spending and pensions.
“If the euro zone gets it wrong, we could be looking at a 2009 scenario,” Geoffrey Yu, FX strategist at UBS, told CNBC Friday.
“There is no plan for growth right now in Greece, so we’re going to see further slippage up ahead.”
Some economists argue that the austerity planned for Greece won’t provide the growth necessary to bring down its debt-to-gross domestic product ratio.
As part of the bailout deal agreed with the troika of the International Monetary Fund, the ECB and EU, Greece has been given a target of getting its debt-to-GDP ratio down to 120 percent by 2020 – it is currently around 160 percent.
“We should acknowledge by now that this 120 percent debt to GDP figure is just something that the IMF pulled out of thin air,” Yu said.
While at the start of the crisis there was talk of a new “Marshall Plan” for Greece, that has “totally fallen off the agenda,” he added.
There are also political pressures in Greece, with politicians keeping one eye on elections which are due later this year, and popular unrest on the streets of Athens over the austerity measures.
“How do you make a country that isn’t structured for the modern world grow?” asked Neilsen.
“I always learnt in school that if you have a fundamental problem, the faster you adjust it, the better for long-term growth. It looks to me in Greece that it has gone too fast for what the social fabric can tolerate.”