Taking stock of the Greek drama

Written by Neil Blake, Head of EMEA Research, CBRE

Ten days after Greek premier Alex Tsipras launched the latest stage of the Greek crisis by calling a referendum on the creditors’ terms for a new bailout we are still in a state of heightened uncertainty.

The only thing that we know now that we did not then is that the result of the referendum was a resounding “no” to the bailout terms (of spending cuts and tax rises). The vote has strengthened Tsipras’ position at home but it appears to have had little impact on the creditors’ negotiating position. The Emergency Liquidity Assistance (ELA) from the ECB that was keeping the Greek banks going has been frozen, Greek banks remain closed and depositors are limited to withdrawing a $60 a day from ATMs and these may run dry by Monday if no settlement is reached.

Greece is due to deliver new written proposals today (Thursday) and a meeting of all EU (not just Eurozone) prime ministers will consider the way forward on Sunday. So, we should know by Monday whether a new deal has been agreed. The signs are not promising. Although there is a growing consensus that Greece’s debt burden is unsustainable, there is little sign of any give in the creditor’s resistance to debt forgiveness or a write-down and Tsipras, with the referendum result under his belt, is unlikely to accede to the demands for continued fiscal austerity and structural reforms without concessions on the debt burden.

If there is no deal, a Greek exit from the Eurozone is likely, with consequences I outlined in our Market Flash of June 29. In the longer term, the Greek economy would stage some sort of recovery. In the short term there would be ongoing capital controls and high inflation as a result of devaluation and sharp falls in real incomes, especially the real incomes of state employees and pensioners –the groups that the Greek government is seeking to protect and who are most likely to have voted yes in the referendum. Add to that the potential for food and medical supplies shortages due to lack of hard currency and the outlook is very bleak. Many groups are starting to talk in terms of the need for humanitarian assistance rather than another bailout.

For the broader European economy and real estate markets the risk is not so much a Lehman-style meltdown but the risk of contagion. This can be financial, political or both. If bond markets are rattled, other highly indebted Eurozone countries would face higher borrowing costs making their financial position even more problematic and pushing them towards insolvency and a potential exit from the Eurozone. This is what happened in the 2011-12 sovereign debt crisis. The country most at risk from financial market contagion is Italy because of its large government debt to GDP ratio but Spain, Portugal and Ireland would also be at risk. There are, however, some reasons to think that financial market contagion can be checked as the ECB now has considerably greater firepower through its QE programme and greater freedom of action than it had in 2011/12. On the political front, the concern is that a Greek-style exit would be seized on by populist parties as a plausible anti-austerity policy. Spain faces a general election by the end of the year and the opposition Podermos party, a Syriza lookalike, has surged in popularity since its creation less than two years ago. If Podermos came to power or even if Podermos were to be running close in the opinion polls in the run up to the election, Greek-style financial chaos could follow. The risk of political contagion is one reason why Greece’s creditor countries have adopted such a hardball negotiating stance. The harder on Greece that a GREXIT is seen to be, the less likely it will be for other political parties such as Podermos gain electoral ground. Clearly these sorts of political calculations have a very high chance being wrong.

This all sounds pretty bleak, for Greece at least although, it has to be said, that the bond markets of Spain, Italy, Ireland and Portugal have been pretty resilient in the face of the crisis. Our view is that there is still a chance of agreement over the weekend. If the debt burden can be eased in some way, without outright foregiveness, the creditors in general, and Germany in particular, might be able to sell the deal to their electorates. One possibility is a linkage between debt repayment and debt service and the state of the Greek economy (nominal GDP).There would be debt relief now but the liability would return when the Greek economy started to get back towards its pre-recession size. This is not too far from Syriza’s original negotiating request but it was lost amongst the bad blood and failed negotiations of the last five months. The creditors might want to stand firm but there is growing political pressure to reach a deal from the USA (who are afraid of Russia filling the political void) and some sympathy for Greece’s potential humanitarian plight if not its economic woes from other European electorates and this might, if only might, offer a way out of the current impasse.