Greece: Can it get any worse?

I do not think the famous quote ‘it’s going to get worse before it gets better’ has ever felt as applicable as it does now after Greece received its third bailout this week.

Greece finally came up with an austerity programme that met with the IMF, ECB and other European Governments’ arguably high standards and it has been offered an 86bn Euro bailout. But that is not all! Greece’s Prime Minister Alexis Tsipras has also resigned as PM and called for an election after admitting, “We did not achieve the agreement we expected before the January elections.”

The conditions that Greece will have to meet would be seen as unfair if they had not made such a mess of their economy over the last few years, but there seems no other way forward for this flailing economy, with a bailout the only thing currently keeping them hanging on to the Euro.

The new fiscal targets that Greece will have to meet will be a 0.25% deficit this year, and surpluses of 0.5% in 2016, 1.75% in 2017 and 3.5% in 2018. The important question from this is why these economic bodies would set such unreachable targets? With a debt-to-GDP ratio of 177% we understand that Greece needs to start improving and getting its economy back on track, but why kid ourselves and think that the economy could genuinely have a surplus by 2016?

The Greek government have also committed to an ambitious privatisation programme, contradicting Tsipras’s early plans to halt privatisation plans. This new programme will arguably make Greece’s companies more competitive, both domestically and internationally, and should reduce the government’s budget deficit. However, the plan will impact already high social tensions and the government is unlikely to be able to sell off their assets at fair prices, with companies knowing that they will have to sell irrelative of the price.

Furthermore, the new welfare changes could cripple the economy with tougher taxes, older retirement ages and reduced pension schemes and an overhaul of the social welfare and benefit system.

The deal has also lead to further political uncertainty, with Tsipras stepping down and a large proportion of the Syriza rebels who voted against the latest bailout deal forming a new Popular Unity party.

There are also other factors that stand in the way of Greece’s recovery, such as Germany’s rigidity and the economic and social relations with Greece and its major trading partners.

From the start, Germany has stood firm against Greece’s pleas to allow it to default on some of its debt, but has Merkel been right do this? It could be argued that her lack of flexibility is stopping Greece from even seeing a recovery in the horizon and there should be an offer to write off some of the debt for the sake of future prospects of the Euro.

However, as the Euros leading economy, Germany has had to loan significant amounts of capital to Portugal and Spain, and these economies would surely expect to be given debt relief too. Once this happened, there would be the possibility of a domino effect throughout Europe, which would lead to significantly diminished international relations in Europe and the idea of economies leaving the Euro even more plausible.

With the exemption to European economies, Greece’s two main trading partners are Russia and Turkey. With the Islamic state circling Turkey and ever-increasing sanctions being held over Russia, Greece is becoming even more reliant on the EU for international trade, so the idea of GREXIT and the trading barriers that would come with it seem rather unattractive for Tsipras’s party and therefore unlikely to occur.

So, the important question is where could this lead us? It will end up going in one of several directions; Greece will continue getting bailed out until it is allowed to write off some debts, a miracle will occur and Greece will somehow reduce its debt burden and meet its surplus targets over the next few years, or Greece will default and leave the Euro. All of these options will negatively affect European markets:

Performance of the EURUSD over the period of 2013-2015…
Performance of the ATHEX over the period of 2005-2015…

After the amount that Greece has borrowed over the last few years and the little impact it has had, it is clear that this new bailout is only a short-term solution and another bailout may be called for in the future. If this was to happen, it would mean the outlook for the Euro would follow its current trend (as shown in the EURUSD 2 year graph above) and look quite bearish over the medium-to-long term.

If this scenario was to take place, the ATHEX would also take a beating, as it has for the last 8 years (as shown in the ATG 8 year graph). If Germany does eventually cave and allow Greece to write off some of its debts, it may again give temporary relief, but Greece are so indebted that it would not have a hugely positive influence on the market.

If Greece somehow manages to get its debts in order and meets its austerity targets, the Euro and ATHEX would start looking more positive again, increasing in value. This is incredibly unlikely to happen.

If Greece gave up on the debt mountain, defaulted and left the Euro, the Euro would fall in value in the short term amid fears that other economies would also leave. If these economies did start leaving, the Euro would really slide, with the concern among economists being that this would mark the end of the Euro. However, if Greece was the only economy to leave, it would be good news for the Euro, but bad news for the ATHEX.