Last week marked a historic moment for Greece and the European Union (EU) as Greece ended their financial bailout. Following years of guidance by its creditors, Prime Minister Alexis Tsipras declared “this is a day of liberation.” On the surface, this is good news for Greece and even better news for the 28 members of the EU—it’s a symbolic end to the European Sovereign Debt Crisis. But what does it really mean?
Flashback to 2010: Greece needs help
Following the 2008 financial crisis, many European countries such as Spain, Italy and Portugal had difficulties servicing their government debt. Greece in particular was hit hard during this time battling recession, economic reform, spending cuts, tax reform, protests, riots and five parliamentary governments between 2009 and 2018.
The Greek depression started because of structural weaknesses in the country’s economy and revelations that previous information on debt levels was underreported. The original reported debt in 2009 was €269 billion but was corrected and raised to nearly €300 billion.
If that wasn’t enough, Greece suffered from poor GDP growth following the financial crisis due to a sharp drop in tourism and shipping, two of the country’s largest industries. The country also had a significant deficit where spending far exceeded tax revenues due to rampant tax evasion by the population.
Eventually Greece was frozen out of financial markets. When Greece asked for financial rescue from the EU and the International Monetary Fund, it received three bailouts starting in 2010 totaling €260 billion. The money came with drastic austerity measures leading to high unemployment, loss of property for many Greeks, a smaller economy, significant reforms and mass emigration.
The bailouts have ended, but how is Greece now?
Things have improved in Greece, the bailouts have ended, which means Greece is once again a self-financing country. The EU Commission is predicting 1.9% growth in the economy for 2018 and 2.3% in 2019. Additionally, the country has a cash buffer that can cover capital needs for 22 months, a balanced budget with a small surplus (0.8% of GDP), a revamped pension system and an independent tax collector. A 10-year Greek bond is yielding about 4.3%, still the highest in the region.
It’s looking positive for Greece but there are ongoing issues we are analyzing closely:
● Billions are still owed to creditors who will continue to watch the country’s economic overhaul. Greece will be repaying them for the next 42 years.
● While unemployment has dropped, it remains high at 20%.
● The improving economy still has a way to go as it shrunk more than 25%.
● Ongoing austerity measures though PM Tsipras has promised higher wages, more social support and lower business taxes.
Despite Greece’s issues, the event can be seen as a general symbol of improving conditions in the Europe.
Greece remains a member of the EU after the idea of a ‘Grexit’ floated around in 2015 which strengthens their economic outlook.
With 28 members, 19 of which have adopted the Euro, managing all the relationships, interdependencies and differences will continue to be tricky. However, as Greece has figured out first hand, the constraints of the EU comes with significant benefits.
Should we be celebrating?
With all of this in mind, it is important to keep perspective on Greece. It has a very small capital market and makes up a minor portion of the global economy. Overall our exposure is minimal. As my colleague outlined last week, we continue to overweight European equities as we continue to expect solid growth from the region at this time. Additionally, we have benefited from being short the Euro.
Global growth remains positive and Europe is coming out of a double-dip recession. Along with Greece ending its bailouts, Europe appears ready to remove some quantitative easing measures by the end of this year, as it was announced earlier this year. It’s even possible that the European Central Bank (ECB) will be in a position to raise rates as early as next year. With a decent level of growth in the region and inflation starting to move closer to targets, we see this as a generally good story.
It was only fitting that PM Tsipras made the announcement from Ithaca Island. In Homer’s epic poem the Odyssey, Ithaca is said to be the home of Odysseus, who returned home after a dramatic 10-year journey following war in Troy. Much like Odysseus, this chapter of Greece’s modern-day odyssey is over.
If you have any questions about what this means for Greece, the global economy or your portfolios, please reach out to your MD Advisor.
Patrick Ercolano, CFA, MBA, is a Lead Portfolio Manager with the Investment Management and Strategy team at MD Financial Management. He oversees strategic and tactical asset allocation mandates, alternative investment mutual funds and is a member of MD’s Tactical and Risk Allocation Committee.