Shackled and burdened: Greece to enter a twilight world? (1)

TBI's Gareth Lewis: "An economic problem requiring political agreement has created an inherently unsatisfactory conclusion."

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Julia Grimes
Published: 14 Jul 2015 Updated: 03 May 2016

Gareth Lewis, Chief Investment Officer at Tilney Bestinvest, comments:

“Throughout the unfolding Greek debt crisis a compromise agreement was always believed to be the most likely outcome. Bound together by differing, but equally unacceptable consequences of a ‘Grexit’, it was felt that both sides would in the end agree to a settlement that cemented the Greeks ongoing involvement within the Eurozone. Unfortunately a detailed reading of the terms announced following the weekends tortuous negotiations appear to have achieved no such thing.

The headline terms:

  • The Greek parliament must immediately adopt laws to reform key parts of its economy; streamlining the pensions system, boosting tax revenue, liberalising labour law, privatising the electricity network and extending shop opening hours.
  • Agreement in principle that negations will then begin on a loan package of between €82-86bn.
  • The country will receive €12bn of bridging finance to avoid bankruptcy - €7bn immediately €5bn in August.
  • Loan will be made by the European Stability Mechanism (ESM), with support from the International Monetary Fund (IMF). ESM loan conditional upon parliamentary approval in Finland and Germany.
  • A repayment vehicle will be created to hold €50bn of Greek assets ahead of privatization. 50% of the sale proceeds will be used to pay back part of the loan, the balance will be used to recapitalise the banks.


“The above terms carry multiple points of conditionality which guarantee to prolong the current process through the summer and into the autumn.

“While Tsipras will face a revolt among his current Governmental coalition, it is probable that sufficient support for the bailout exists among opposition Greek parties for the terms to be approved tomorrow (Wednesday). The prospect of a dysfunctional Government that has abandoned the terms of its elected mandate then raises the prospect of either a minority Government of national unity, or in all probability, another election – possibly by the autumn.

“Assuming a Greek vote to approve the deal, the requirement then shifts to parliaments across the Eurozone, with six countries constitutionally required to approve the terms. The first major hurdle will be a vote in the Bundestag on Friday, but it is likely that countries such as Slovakia will show their displeasure by failing to ratify the agreement.”


“Assuming these hurdles are overcome, emergency funding will be released to meet the short term liabilities. An initial €10 to €12bn has been earmarked to provide liquidity support for the Greek banks, probably to be released in two tranches, while bridging finance will be put in place to meet current arrears and the looming bond repayment to the European Central Bank (ECB) due on the 20th July. Assuming this payment is made, the pressure of default eases, with the final obstacle becoming the August ECB repayment.

“Critical in this process will be the actions of the ECB, which has to decide whether to amend or extend the terms of the emergency liquidity assistance which is currently the only lifeline keeping Greece’s banks afloat.”

Loss of Sovereignty

“While the bailout terms are far harsher than those rejected by the Greek electorate just last week, the real issue is the loss of sovereignty created by these terms. Greek laws, required to be passed by an elected Greek Government, are being written by foreign politicians with at least one eye to their own domestic political constituents. Not only that but the terms of these laws will go against the mandate by which the current Government was elected.

“With the bailout fund controlled by the Greeks but monitored by Eurozone institutions, even the timing and process of possible privatisations will fail to have complete control by the Greek government.”

Future for the Eurozone

“While fears over the short term future of the Eurozone will abate as the bailout package passes through its various parliamentary stages, the real battle is only now beginning. The fractious nature of the negotiations has widened the already deep rifts that exist between the Eurozone members over its future direction and purpose. The negotiating position of both France and Italy was increasingly at odds with those of Germany, who appeared more driven by the letter rather than the spirit of Eurozone law. With these wounds unlikely to be healed as the Greek crisis rumbles on, the longer term risk lies in other peripheral countries who may decide their own future is better controlled domestically rather than from Luxembourg or Brussels.

“All of this could play out rather badly within the UK where fear over the increasing hegemony of Germany and its vision for the Eurozone may play an important part in the forthcoming EU referendum.”

And what of the Greeks?

“Without debt relief there can be no lasting solution for the Greeks within the Eurozone. Shackled by even greater fiscal austerity and burdened by the legacy of a debt pile built up through three bailouts, the chances of Greece ever repaying the outstanding debt appear remote. Greek debt to GDP has soared over the past three years, not because the debt pile has increased, but because GDP has collapsed as the Greek government attempted to institute terms of the previous bailout. IMF projections made in 2012 over the likely impact of austerity on GDP have proved woefully inadequate, calling into question the validity of the economic model upon which the current bailout has been based.”

Lewis concluded: “An economic problem requiring political agreement has created an inherently unsatisfactory conclusion. All parties around the negotiating table will have much to regret about the terms announced yesterday. An agreement has been reached, but as with many compromises the cost of this agreement could prove far higher than many currently envisage. Greece looks doomed to enter a twilight world, neither living nor dead, dependent upon the largesse of foreign powers who are driven by their own political imperatives. Meanwhile the schism opened at the heart of the Eurozone by the German negotiating position has arguably done more harm to the union's long term future than would have been the case had the Greeks been forced to exit.”


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This release was previously published on Tilney Smith & Williamson prior to the launch of Evelyn Partners.