Europe Economy

If Greek Deal Is Sealed, Troubles Remain


Greece’s second bailout deal is expected to finally be sealed later Monday at a meeting of the Eurogroup of euro zone finance ministers, but the troubles of the heavily indebted Mediterranean country will stay on the markets' agenda, analysts believe.

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“The probability of Greece formally defaulting on the 20th of March is decreasing, but the more interesting question is what happens in a year’s time?” Bob Parker, senior adviser at Credit Suisse, told CNBC Monday.

“We are still going to end up with debt-to-GDP (gross domestic product) somewhere north of 120 percent by 2020. That debt overhang has not going away. Does Greece have the ability to repay and service debt to GDP well above 100 percent for the next eight years? I think we all know the answer is no.”

The International Monetary Fund now expects Greece's debt to reach 129 percent of gross domestic product in 2020, rather than the previously hoped-for 120 percent, according to a report in the Wall Street Journal.

Greece’s debt-to-GDP ratio is currently above 160 percent. The country’s government is facing internal protests over austerity measures planned as part of Greece’s second bailout, including cuts to pension and public sector pay.

“With the social unrest and level of social cohesion we have at the moment, it’s going to be very difficult to impose these measures,” Costas Michalos, president of the Athens Chamber of Commerce, told CNBC.

“The bailout is necessary, but the mixture of economic policy applied throughout this must be different. If you keep on milking a cow without feeding it, you’re not going to get the right result.”

A new government will be elected later this year. While the political parties in Athens have all provided written commitment to keeping the terms of the bailout package, their approaches could differ.

“When a new government has a new mandate, they will have to start looking seriously at a new privatization program. The government hasn’t addressed the problems in the most direct way,” Michalos said.

“We have to start looking at reducing tax rates, because at the moment the business community is suffering a tax rate of 52 percent.”

He called for penal measures to enforce tax collection, notoriously one of the biggest issues in Greece’s deficit.

The effects of the new deal outside Greece’s borders are also unpredictable. Parker believes that the effect of large write-downs in the value of Greece’s sovereign debt have already been factored into the market.

The risk of contagion into other European countries is ever-present. Portugal, widely viewed as the euro zone country most in danger of defaulting on its debt repayments after Greece, has seen its bond yields fall below 12 percent in recent weeks, a sign that the market is more confident about its bailout.

“The next question is of contagion risks, most notably in Portugal,” said Parker.

“All the evidence is that Portugal is complying to the letter with the terms of the bailout program, the ECB is backstopping it, and the troika is absolutely determined to minimize contagion risk. Even if you have the worst case scenario of a Greek default, I would argue that is nearly 100 percent discounted in the markets.”