Our take on the situation in Greece

Greece’ Debt Crisis is a major headline.

Its effect on Australian client portfolios is likely to be muted however one cannot discount the risk that a contagion could occur through some other exposure like Russian banks for example. Because of the number of questions generated by the real possibility of a “Grexit) it may be prudent to provide some insights. Over the next quarter, Greece owes €17 BN to the IMF, ECB and the Emergency Liquidity Assistance fund (ELA). Refusing to pay the IMF would not formally put Greece in default on its huge government debts – since the IMF is not a commercial lender – but it would represent a big step towards that eventuality and open the question as to whether Greece, without an agreement with the Eurozone, will be able to redeem more than €3BN of bonds at the European Central Bank next month. To get more funding, the Europeans and most importantly the IMF are insisting on a clear, believable and effective reform program.

Greek banks are running out of deposits.

Now at a 10 year low, and the ELA has extended over €80 billion to help them stay solvent. The banks have used Greek bonds, notes and T-bills as collateral but these opportunities are fast running out. Greece votes on whether to accept the terms of the bailout on Sunday. Unfortunately till then one can only speculate on an outcome and the ensuing effect on global financial markets. Greece submitted a proposal to its creditors, which accepted most of the terms of the bailout with a few amendments. The European Union flatly rejected it.

The Financial Times reported:

‘Mr Tsipras’s letter to creditors said Athens would accept all the reforms of his country’s value added tax system with one significant change: keeping a special 30 per cent discount for the Greek islands, many of which are in remote and hard-to-supply regions. ‘Eurozone officials said keeping the exemption would significantly increase the size of the government’s budget shortfall and, more significantly, perpetuate a highly complex VAT system. This complexity is one reason Greece has exceptionally low revenue from VAT. ‘On the contentious issue of pensions, Mr Tsipras requested that reforms passed in 2012 be implemented more slowly. He also asked that a special “solidarity grant” awarded to poorer pensioners, which he has agreed to phase out by December 2019, be reduced more slowly than creditors wanted.’ 

The creditors said there will be no negotiations until after the results of the referendum. They clearly want to make the Greek people live with draining capital controls (which restrict their access to cash) for as long as possible. They want them to have a taste of what life is like with creditor support.

It also suggests they think the ‘yes’ vote will win. They are betting that the Greek people will see the vote as a referendum on staying in the Eurozone, rather than on the terms of the bailout package.

The upcoming referendum in Greece shall be the next chapter in  what has been a long period of uncertainty for the nations people.