The Daily Update - Greece and Eurozone

The German word ‘schuld’ means ‘debt’ but it also translates to ‘guilt’ and ‘shame’ and perhaps goes some way to explaining Germany’s more rigid austerity driven approach to Greece and its debt.  In contrast, the IMF has been extremely vocal about the need for ‘debt restructuring’ and a dose of reality in the economic projections for its participation in any Greek bailout.

Understandably, both the IMF and Eurogroup have insisted upon some credible structural reforms in return continuing to disperse yet further bailout payments, although the IMF’s and the Eurogroup’s views on the appropriate degree of austerity and realistic budget estimates still seem some way apart.  The IMF is working with a more pessimistic set of forecasts than the Eurogroup and is sceptical about the primary surplus target with Christine Lagarde stating: “The 3.5% in the short term might be achievable by some heroic, and I really mean heroic, efforts on the part of Greece and the Greek people.”  But “what we find highly unrealistic, on the other hand, is the assumption that this primary surplus of 3.5% can be maintained over decades. That just will not happen.”  The IMF thinks it is more realistic to assume a primary surplus target of 1.5% (by 2018) with debt relief.

Some progress has been made on the IMF request for contingency austerity measures to be legislated for in the event that the Eurogroup ignores the IMF and still runs with the 3.5% target; Jeroen Dijsselbloem stated Greece will legislate a mechanism to generate the €3.5bn of additional savings (~2% of GDP) and this “approach was agreed and supported by the IMF today in the meeting.”  However, the problem is that the IMF thinks the additional savings “would only be credible based on long overdue public sector reforms, notably of the pension and tax system.”  The IMF does not support Greece’s proposed “short-term across-the-board cuts in discretionary spending…or transitory cuts in pension and wages.”

The latest Eurostat figures showed Greece’s government debt to GDP ratio easing to 176.9% at the end of 2015 and a primary surplus (excluding interest payments and other one-off items) of 0.7% of GDP versus an adjusted primary deficit target of 0.25% under its bailout program. If interest repayments and the bank recapitalisation are included the deficit was 7.2% of GDP.  But the IMF’s criticism of the lack of sustainability in the programme is even echoed by the ESM’s debt sustainability analysis which, in the absence of debt relief under their baseline scenario, show Greece’s financing needs escalating from 9% of GDP in 2022 to 19.5% by 2040 and 24.3% by 2060.

The IMF’s call for debt relief has been further escalated ahead of the Eurogroup meeting with a leaked letter from Christine Lagarde warning “for us to support Greece with a new IMF arrangement, it is essential that the financing and debt relief from Greece’s European partners are based on fiscal targets that are realistic because they are supported by credible measures to meet them”.  Earlier this week ‘debt restructuring’ was finally discussed by the Eurogroup.  But any restructuring still appears ‘Germanic’ in its approach focusing more on refinancing, interest rate holidays and lengthening of maturities rather than any write-down of the principal amount. 

For us the Greek dilemma is an illustration of the problem of creditor and debtor nations entering into a currency union, particularly in the absence of a European Treasury with a unified fiscal policy and fully functioning redistribution mechanisms.  As it stands, the adjustment process to reduce imbalances has taken the route of austerity which has hit the debtor nations hardest in terms of weak growth and deflationary pressures, exacerbated by the lack of debt write-offs.  Budgetary stimulus to boost demand has been lacking in the North and has not been helped by Germany’s balanced budget target despite it having a sizeable savings and current account surplus.  Faced with this backdrop, it comes as little surprise the EC Spring forecasts downgraded Eurozone inflation to 0.2% for 2016 with 2016 GDP growth forecast to languish at 1.6%, down from 1.7% in 2015.

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.