These comments are being written as a follow-up to our blog post on June 29, 2015 – Greece Default Looming
With Greek banks only days away from running out of money, Prime Minister Alexis Tsipras finally consented to a slew of austerity measures on Monday required by lenders to open the door for $94 billion in additional financial aid. A series of so-called “lines in the sand” quickly vanished, including objections to tight international oversight of Greece’s economy, continued involvement by the International Monetary Fund in Greece’s bailout program, sales tax hikes, cuts to pensions, and further labor reforms. Greek lawmakers voted to approve the deal on Wednesday night against the backdrop of anti-austerity protestors turning violent and clashing with police in the streets.
With news that the bailout package vote was positive, the European Central Bank granted an additional 900 million euros in so-called Emergency Liquidity Assistance (ELA) to Greek banks. This was deemed a necessary step to reopen banks which have been closed for almost three weeks.
This latest lifeline represents Greece’s third bailout in the past five years and seems to take a “Grexit” from the euro, at least temporarily, off the table. U.S. and European equity markets rallied on the news, and it appears that global investment sentiment has generally improved over the course of this week. However, there are still doubters, unanswered questions, and uncertainty driven by politics of the region.
- Influential economist, Mohamed El-Erian said Thursday that “despite the new rescue package, there’s still a strong risk that Greece will eventually have to drop the euro. His comments are in part due to the significant debt burden that Greece carries and which the International Monetary Fund says is expected to peak at close to 200 percent of its national output.
- The International Monetary Fund is leading calls for a deep write-down in Greece’s debt. Earlier this week they said that Greece needs far more debt relief than European governments have been willing to contemplate.
- Germany’s conservative Finance Minister, Wolfgang Schaeuble, has said that even if a debt write-down may be needed, it is not possible under European rules. Schaeuble has also recently raised the idea that Greece should take a temporary “time-out” from the euro zone, a proposal that undermines Prime Minister Merkel and the package she just helped negotiate with Greece. Schaeuble has submitted a request to Germany’s parliament to agree to opening talks, but he has said it would be hard to make Greece’s debt sustainable without writing some of it off – an idea Germany considers to be illegal as long as Greece remains within the euro zone.
- The package of tax increases and pension reforms agreed to by P.M. Tsipras don’t match the campaign pledges on which he ran for office. This is already leading some in Greece to question his ability to continue governing.
- Described by many Greek politicians as “a national sport,” the government has pledged to get tough on tax evasion. It is estimated that up to 30 billion euros per year in tax revenue goes uncollected. This is a must-do initiative!
We strive each day to understand the investment implications of global events, major or minor, and manage your portfolio accordingly. The Greek saga is complex and ever-changing, so we’ll continue to stay abreast of future developments.
Chad A. Sander, CFP®
Vice President, Director of Investments, Chief Compliance Officer
PAYNE WEALTH PARTNERS, INC.
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