Greece is again in the headlines after international creditors agreed on another bailout package, without which the indebted and struggling economy would have soon seen another default. Yesterday’s 11 hour negotiations have been heralded as another “breakthrough” amidst an impasse of 6 years and counting; as the champions of debt relief (IMF) conceded enough to reach a deal with the restructuring opponents (personified by Germany’s Finance Minister Wolfgang Schauble). Even so the IMF will still have to substantiate that the new arrangements allow Greece to meet its normal lending standards before it participates on further lending alongside the Eurozone.
Agreeing that Greece has done what was required since the last package (bar a few outstanding issues on privatisations and pensions) this essential €10.3bn package will begin flowing into - and soon back out of - the country next month (over €30bn of debt matures this year). Moody’s announced that the deal is “credit positive” - by which they mean the country would have been quickly downgraded without it. The country remains Caa3 rated with an upgrade “not likely over the near time” with Moody’s only going so far as to say that the promise of €10.3bn of bailout loans alleviates the danger that the country defaults “this summer”.
Contrastingly Eurozone ministers state that these measures will make Greece’s debt “sustainable”, but such a broadly interpreted word is a garble of the underlying debt projections. Yesterday’s agreement will still have to be built upon with significant levels of relief and growth otherwise IMF project Greece’s financing costs to surpass 20% of GDP by 2030 with public liabilities quickly soaring to 200%. Importantly, even if the IMF convinces both sides to accept ALL their bold reforms and concessions they still forecast Greece’s public debts to remain above 100% of GDP until 2060 (see IMF’s most recent debt sustainability analysis). As our investment process avoids investing in countries with total indebtedness above 50% of GDP, currently we don’t expect to be investors in Greek debt for the next century (or so).