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Market Watch – Special Edition – Greece

July 2015

The Greek crisis has probably been the biggest economic news story of the year; certainly it is the longest running, an ever evolving situation that makes most analyst’s words obsolete before the ink has properly dried.

We believe that the following excerpts from an economic note written by Perpetual’s Mathew Sherwood  reasonably sums up Greece’s problems.

After the Greek economy recorded a few flickers of life after a five-year depression, the new government has:

  • become the first advanced economy to default on the IMF
  • brought its banking sector to its knees
  • denied households access to their money
  • seen bond yields spike
  • told its citizens to reject a generous bailout offer from its creditors and then accepted more draconian austerity package in a second round offer

And the aftermath of all of this is that the country’s debt is likely to rise further and its economy will be back in recession in the September quarter …

In the end, the Greek government has accepted a worse deal because its refusal three weeks ago made the terrain considerably more difficult with a collapse of its banks and an economic meltdown the only alternative.

… There are only three ways out of a debt crisis – you grow your way out, inflate your way out or you default your way out. Greece can’t do the first two, which only leaves default and in the end, the country was not given the debt restructuring that it needs, which means that the five-year old battered can has been kicked further down the road in true European style.

In the scheme of things Grexit has not been resolved, it has only been delayed and the key question for investors is whether the inevitable debt write-off will be orchestrated by the ECB or the Greek government because if it’s the latter, market volatility is certain to rise.

Stop Press – Excerpt of a release by BBC News on the 16th of July Eurozone ministers have agreed to give Greece a €7bn (£5bn) bridging loan from an EU-wide fund to keep its finances afloat until a bailout is approved.

The loan is expected to be confirmed on Friday by all EU member states.

In another development, the European Central Bank (ECB) agreed to increase emergency funding to Greece for the first time since it was frozen in June.

The decisions were made after Greek MPs passed tough reforms as part of a Eurozone bailout deal.

The bridging loan means Greece will be able to repay debts to the ECB and IMF on Monday.

Greek banks, which have been closed for nearly three weeks, could also reopen on Monday, Greek media reported, although credit controls will remain in place.