On July 5th, a few days after defaulting on a payment to the IMF, a Greek referendum appeared to signal the country’s rejection of reform demands which European leaders would require in order to secure Greece’s place in the Euro and a third bailout in five years. On July 11th, less than a week later, Greek Prime Minister Alexi Tsipras authorized a bail-out deal which included austerity conditions that were stricter than those rejected at the referendum and Greece now seems to have secured its place in the Eurozone for the time being.
Why the sudden change of heart? Should a Greek exit or “Grexit” have occurred, it not only would have been a burden on the European creditors, but it also would have been crippling to the Greek economy, signs of which were already starting to rear their head as Greek banks shut their doors and imports ground to a halt in the days leading up to the referendum. While Greek’s hoped for some leniency in the Europe’s terms for a Greek bailout, as the 11th hour came, the European Central Bank (ECB) signaled it was refusing to yield on its terms and that emergency liquidity would be cut off on July 13th. With limited cards to play, the Greek parliament overruled the referendum results and an overwhelming majority of 251 out of 300 votes agreed to send the prime minister back to the negotiating table with European leaders in hopes of making a deal.
Details of the Agreement
The result of the negotiations was a promise for up to €86 billion over 3 years, should Greek parliament pass legislation to include it’s creditor’s demands for austerity reform. These reforms include pension and value-added tax changes, as well as an effort to overhaul the public sector as Greece must take measures to de-politicize government institutions and sell or privatize €50 billion worth of valuable public assets. In addition to the liquidity granted by the ECB there may be a relaxation of the terms of Greece’s existing financial obligations. There is also potential to unlock an addition €35 billion in additional investment from the European Commission and €12.5 billion from the privatized Greek fund.
Despite all of the recent drama and late night summits, global markets are still in line with projections at the start of the year – slow but steady growth, low inflation and interest rates, and a strong US dollar. The Federal Reserve is still looking to raise rates at some point in 2015. Even when the Grexit looked most likely, bonds in the other peripheral European economies, Portugal, Ital and Spain, have seen little impact, which is an indication that the market’s perception of the risk of contagion is low.
Going forward, the market will likely still be a bit jittery until the reforms are passed and the reaction from the Greek people can be measured, but look for attention to move back to the Fed and their decision to raise interest rates. Strong data in US new home sales and consumer spending this past quarter have curtailed the slower start in the cold first quarter of 2015.
The message in all of this, is that events such as the possible ‘Grexit’ can often appear to be a much bigger concern by the scope of the newspaper space they occupy than what is actually justified. The key lesson here is to stay the course, stick to your plan, and not get spooked by day to day market fluctuations.
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