7th July 2015
Markets are relatively sanguine and pricing in a possible deal for Greece despite high uncertainty, says Rowan Dartington Signature’s Guy Stephens…
The birthplace of democracy has spoken. Prime Minister Tsipras’ referendum gamble has paid off and a ‘No’ vote has been returned.
This was not what was expected but on listening to the views of several voters of both sides, the shift to a ‘No’ vote was influenced by the statement from the IMF last Thursday that the country needs another €60bn and large scale debt relief in order to stabilise the economy. Mr Tsipras may think he has achieved a great victory but these words from the IMF would appear to have added weight to the arguments for debt relief. Faced with two options, a lifetime of economic austerity in an impossible economic predicament or perhaps something better where there is an acknowledgement from one of the troika members that the status quo is unsustainable, has probably given some confidence that the views of the Greek people have some merit.
The resignation of Yanis Varoufakis also improves the chances of a deal as his abrasive style was an obstacle to further progress. The markets, for the moment, are pricing this in and are relatively sanguine. It now looks like the hard-line and uncompromising stance in evidence up to now may be softening with France, apparently more conciliatory whilst Germany remains steadfast. There are several emergency meetings of ministers in Europe and also in the UK over the next few days which demonstrate the seriousness of this. It would appear that the next debt repayment of €2bn due on 10th July (Friday) is irrelevant as banks will most likely have failed by then. Will the ECB ministers really pull the plug and be the instigators of a humanitarian crisis? Unlikely.
Angela Merkel has a domestic political problem with softening her stance but clearly, we are now looking at the prospect of a complete wipe-out of the debt funding from German taxpayers if Greece leaves the Euro rather than a haircut of partial relief. Continuing the status quo of demanding payment is no longer an option.
Last week Prime Minister Tsipras agreed to much of the deal that expired on Tuesday with some exceptions which were a sticking point for some nations. However, we are down to three main differences being, the 30% VAT discount for the Islands, increases in corporate tax for businesses and cuts in military spending. It would appear that the targets for spending cuts and revenue raising are not in dispute, it is the amount that is to be saved or raised. Clearly, the statement by the IMF does make this detail rather irrelevant as they are trying to empty the ocean with a bucket.
Many commentators believe this ‘No’ vote signals Grexit but we would not be so sure. The IMF figure of €60bn over 3 years sounds huge and it is relative to the size of the Greek economy. However, the UK will add £76bn to its debt mountain in fiscal year 2015/16 alone and £131bn over the same 3 year period, but via capital markets rather than the troika.
This is far from over and the brinkmanship will continue, effectively extending the bail-out by defaulting but Greece’s future is now out of its hands. The game changer will be if the ECB decides to withdraw current liquidity support for the banks – it has already refused to increase it, hence the capital controls. This will cause the banking system to collapse with no backstop which would be when the IMF normally gets involved in any other country’s situation. Securing financial stability is one of its responsibilities and partially why it came into being in 1945 following World War II. And perhaps this is Tsipras’ big gamble. The ECB may walk away but it would be a dereliction of duty if the IMF abandoned a country in financial meltdown. Also, is the ECB really going to trigger financial meltdown in Greece by allowing the banks to collapse?
Outside of Greece, there is the first Conservative budget on Wednesday which should make interesting reading. There are strong rumours that the Inheritance Tax threshold will rise to £1m and the electoral mystery of the £12bn welfare budget cuts should be revealed. There have been hints over the weekend but this is still largely under wraps. Something new to analyse away from Greek brinkmanship. There may be nice surprises on the economy as growth would appear to have been stronger than originally thought.
On whatever front, there is much to keep us occupied this week in what is usually a quieter period.