What Will Greece’s Return Mean for the Financial Markets?
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Greece is making steady progress after a painful period of economic malaise. A bane upon Europe, this EU nation almost wrecked the EUR and most certainly precipitated the Brexit. Now, Greece is working hard to extricate itself from a financial quagmire with plans to sell debt for the first time since 2014.
This is a test for Greece and the financial markets, given the volatility that this country has subjected the European Union to over the years. Private investors bought Greek debt for the first time in 3 years on Tuesday, 25 July 2017. Greece is currently receiving bailouts from the European Union (EU), and the International Monetary Fund (IMF), among others.
In 2015, it was reported that Greece received bailouts worth $95 billion (€86 billion) in addition to other assistance. At that stage, the IMF had contributed €230 billion to Greece in the form of bailout packages, while the ECB lent approximately €130 billion to Greek banks to keep them afloat.
Behind the scenes, the country has been battling capital flight, with billions of euros exiting the country’s banks and finding refuge in European capitals. Greece will receive its third international bailout in 2018, and comes amid calls from European finance ministers to reduce Greece’s debt burden. Investors who are sitting on the fence about Greece will likely be buoyed by the country’s decision to invest in 5-year bonds worth an estimated €3 billion.
Greece has not featured positively in terms of financial stability, and creditors have been treated poorly by the government over the past 7 years. The IMF did not receive prompt payments under the government of Alexis Tsipras, wrecking the country’s credit rating which now stands at a B - with S&P, CAA2 with Moody’s, and at 10 with TE.
What is notable about these credit ratings is that they are positive in the case of S&P and Moody’s, and stable with TE. This marks a dramatic change from 2015, when the outlook for the country was negative. The economic crisis kicked off in 2014, with Greece threatening to break from the European Union in the highly publicized Grexit saga. Ironically, it wasn’t Greece that broke away, it was the United Kingdom.
Meanwhile, the move to sell bonds has been positively received by the Finance Minister of Greece, Mr. Tsakalotos. For its part, the IMF is dubious about Greece’s ability to repay its debt. No other European Union country owes more money than Greece. Regardless, the IMF has signed off on a third bailout for the beleaguered European nation for 2018. The third debt relief program is worth an estimated €86 billion.
Greece has not been able to make good on its repayments to creditors, and this has many convinced that the country is a financial write-off. Instead, regulators and European financial authorities are seeking to impose a rigid framework and austerity measures upon Greece to make it comply with structural reforms.
Weiss Finance analysts weighed in with their analysis of the Greek financial crisis, ‘There are plans to reduce debt in the public sector and simultaneously offer additional debt relief in the form of new loans. Such proposals seem disingenuous, given the inability of Greece to make good on its repayments. It remains to be seen whether Alexis Tsipras’ government can adopt the necessary reforms to right the wrongs. Nonetheless, it is encouraging that Greece has returned to the bond markets and investors may take a conciliatory tone to the country.’
At the time of writing, bond market orders worth an estimated €6.5 billion have already been purchased, and this presents favourably for the country. Since 2010, Greece has received bailout funds valued at $380 billion. Much of the financial calamity that befell Greece was caused with the collapse of Lehman Brothers on Wall Street.
Analysts are hoping that the 19-member Eurozone will look favorably upon the return of Greece to the bond markets. The Economy Minister of the country, Mr. Papadimitriou has high expectations for Greece. Both he and the Prime Minister are hoping that Greece for be able to participate fully in global financial markets and use the funds generated from bond sales for the public good.
Meanwhile, the EU is experiencing a robust economic recovery with year on year GDP growth of 2.3% for Q1 2017. It is uncertain whether Greece will use the funds generated from government bond sales to repay creditors or rebuild the country’s financial infrastructure. What is equally baffling is why international investors will plough money into the Greek economy, given its poor history. Presently, the balance sheet indicates that Greece will require multiple bailouts to maintain operational efficiency and compliance with rigid EU standards.
That Greece was on the brink of a Grexit is hardly surprising. Greeks were brought to their knees financially, with ATMs limiting cash withdrawals to just €60 per day, and no transfer payments allowed for businesses. Unemployment is down to 23%, and poverty levels are a fraction above those in Romania and Bulgaria. Things have quieted down to a degree since then, but the situation is still balanced on a knife edge.