The jump in the euro was as short lived as the expectations that this bailout deal will actually solve Greece’s problems. Euro-dollar failed at the major resistance level of $1.3300 creating a double top that bears feel could be a tough one to break through to the upside.
We’ve heard of the saying “kicking the can down the road” before, but this time it is particularly apt as Greece’s target of reducing its deficit is so far down the road that even if it does manage to meet the EU’s demands by 2020, it’ll still have a whopping great budget deficit. In the interim its financing needs are around €250bn and that’s if it can generate some sort of anaemic growth beyond what most forecasters expect over the next few years.
Unfortunately, as the country is only able to devalue internally as opposed to having its own currency which it can deflate to get competitive again, the task at hand is monumental. It comes as little surprise that alleged documents leaked by the troika show their own scepticism in the deal that’s been brokered ever being achievable. To make matters worse, this is before any PSI agreement on how much debt it’ll write down and the uncertainty of the outcome of a Greek general election in April.
So Greece has finally taken the appropriate measures to ensure it remains solvent for a little while longer. The government is on the receiving end of €130bn, the second tranche of funding to see it through until 2014. Sovereign debt holders have also agreed to a larger than expected haircut on their existing holdings, while new debt will be issued at a lower coupon.
As long as the Greek government can keep to its side of the bargain and implement the proposed austerity cuts, we should be drawing a line under this issue. Or should we? The deal may have bought Greece a bit more time, but some may ask if Greece is not better out of the euro altogether. Economic growth is firmly on the back burner as an increase in GDP and budget cuts do not really go hand in hand.
Being tied to the euro, which has remained relatively robust despite the crisis, means the Greeks do not have the privilege of devaluing their way back to growth. With increasing social unrest, the government may find it difficult to implement their proposed plan.
While the deal may provide short-term support for Greece and the euro, it does have the potential to fall apart further down the line.
Three cheers all round, Greece is saved! Well, actually, maybe not. The deal cobbled together on Tuesday morning does little to address any of the underlying issues, and is perhaps the final throw of the dice by both the Eurozone and Greece. It assumes that the poor benighted Greeks will somehow succeed in the Heraclean task of attaining GDP growth of 2.3 per cent growth by 2014 and that their debt levels will have fallen to a more sustainable level, notwithstanding the massive loss in economic activity caused by the cleansing of the Augean stables of Greek public finances. Continuing the Athenian comedy theme, the experts in Brussels think they can accurately predict what Greek GDP will be in 2020. Given that most economists don’t know what an economy will look like six months down the line, this seems a tad optimistic.
In the short term, this deal might afford some support for the euro, and tempt a few more buyers out, but dissatisfaction with the end result is likely to build, putting the single currency under further pressure as the year grinds on. I fear that there will be another crisis and another summit a few months on from today, and that this time the mutual patience of Greece and the Eurozone may finally run out.
Understanding the political situation is the key to understanding how fragile the bailout euphoria will be. Payouts from a €130bn pile of cash, or “the carrots” are being dangled in front of Greece’s face, but so too are the economic adjustment programmes and external budgetary oversight which are necessary to secure disbursements of aid from the aforementioned euro area/IMF funds.
The three year long-term repo operations (LTRO) are propping up the system, the euro and keeping a modest risk rally intact, but the political situation has the potential to deteriorate in spite of European Central Bank liquidity, whilst the risk rally is actually dependent on the former. If Greece cannot meet all of its adjustment targets, the country’s external creditors will have to consider moving the goal posts much further down the field; if the goal posts are immovable, then even after yesterday’s deal the risk of a default is still not non-existent.
The euro has already received modest support from previously priced-in expectations of a Greek debt deal this week, so the main questions revolve around the political divide between the north and south of the European monetary union, and the markets taking aim at other impaired euro area sovereign credits. We call this “walking a tight rope”.