Wealthy Nations Daily Update - Growth vs Austerity

Greece is officially back in recession after announcing its second consecutive quarter of negative growth; Q4’15 growth fell 0.6% qoq and growth for Q3 was revised down to -1.4% qoq from -0.9%.  As the assessment of Greece’s compliance with the latest 2015 bailout package reforms takes place (to release further funds) this raises a number of issues.

The IMF, which is still to confirm whether it will join this third bailout, is pro-debt relief on the basis that Greece’s debt to GDP at ~175% is unsustainable; “assuming that Greece can simply grow out of its debt problem without debt relief—by rapidly transitioning from the lowest to the highest productivity growth within the eurozone—is not credible. Similarly, the very limited success in combating Greece’s notorious tax evasion—to make the well-off pay their fair share—means that pension reforms cannot be avoided by simply assuming higher tax collections in the future.”  Both debt relief and pension reform will need to be undertaken.

Only once the government has implemented pension reforms, as agreed with its creditors, can debt relief be considered. Under the current system the creditors consider the Greek pension system is ‘unrealistically generous’ and ‘un-affordable’; budget transfers to the pension system are estimated to be ~10% of GDP. Obviously it is a highly contentious reform for Greek government to implement. Approaches to the problem differ with the Greek’s preferring to increase social security contributions to fund the payment and the creditors preferring cuts to the pension payments.  But last week farmers, faced with higher social security contributions and taxes, held an acrimonious demonstration outside of parliament. This followed a massive general strike earlier in the month to protest against the austerity measures; estimates show the Greek economy has shrunk by ~25% since 2010.  As Alexis Tsipras has stated “We must all understand that, next to balanced budgets, we must also have growth … We need to be more realistic, and show more solidarity too.”

The issue of growth versus budget austerity is not just a ‘Greek problem’ but remains a contentious issue particularly in Southern Europe where deflationary pressures are greater. Q4’15 GDP data showed Portugal growing only 0.2% qoq and it has had its own negotiations with the EU to get its budget which called for less austerity approved; but only after it conceded some further tax hikes. Italian GDP barely grew in the last quarter of 2015 registering growth of just 0.1% qoq.  Matteo Renzi the Prime Minister has been open about the need for a more flexible approach towards budget austerity measures and commented "I am of the belief that austerity doesn't work on its own and can actually lead to the collapse of governments."

Elevated debt levels within the eurozone’s rules based framework, combined with reluctance to adopt a more expansionary fiscal stance by countries with the scope to do so (e.g. Germany), has constrained eurozone fiscal policy leaving monetary policy as the main policy lever. Structural reforms remain essential as a medium term driver of growth by boosting competitiveness and productivity. But with questions starting to be asked about the effectiveness of negative interest rates the magnitude of stringency applied to fiscal measures will increasingly be debated.  Not surprisingly, the OECD issued a warning yesterday in its interim economic outlook in which it downgraded both global and Eurozone growth estimates for 2016 to 3% and 1.4% respectively stating; “The Outlook suggests that a stronger fiscal policy response, combined with renewed structural reforms, is needed to support growth and provide a more favourable environment for productivity-enhancing innovation and change, particularly in Europe.”

For us global growth looks to be weakening and the risks to be rising; this favours positioning in higher quality credits from ‘wealthy nations’ and bonds with a longer duration as the yield curve continues to flatten.


Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.