After a gruelling night of negotiations Greece finally managed to agree the details of its 2nd aid package with the Eurogroup of finance ministers. Ouch! What’s that sting!? Oh yes, no need to pinch yourself; the deal has actually gone through this time. After weeks of tortuous empty threats and broken promises, the €130 billion aid package has finally been secured. The ‘historic moment’ – as termed by undemocratically elected Greek PM Lucas Papademos – will be remembered in Greece, that’s for sure! But will it be remembered as the date when Greece picked up the pieces and turned its finances around, or will it be remembered as the day when democracy was officially wiped from the ancient slates of Greek history?
The preconditions for the 130 billion Euros amount to slavery and will keep the average Greek citizen bankrupt for the foreseeable future, according to Greek Communist party KKE leader Aleka Papariga. The strict austerity measures that include slashing the minimum wage by 22%, expansive job reductions, and extremely unpopular pension cuts, are supposedly going to help Greece cut its debt to GDP ratio down to 120% by 2020.
And yes I know! A debt bill one-hundred-and-twenty percent of Gross Domestic Product, in EIGHT years time sounds more like a holiday in Cambodia than a trip to gay Paris in the spring time. But the Greek prospect gets worse – much worse – when you consider that 120% debt-GDP is a long shot, a ball-park figure that many economists believe is impractical and unreachable.
The triplets of power known as the ‘Troika’ consisting of the European Central Bank, the European Commission and the International Monetary Fund, put together a depressing report detailing the task at hand for Greece. The leaked document showed that in all likeliness Greek debt to GDP will continue to rise until 2015, where it is projected to peak at 178% before it even begins to descend. The report then suggests that by 2020 Greek debt to GDP will actually fall on the same figure it does today, 160%, unless a further €245 billion is pumped into the economy.
Peaceful protests, student riots, arson at the underground cinema, smashed windows, petrol bombs in the University Law Library and Greeks hanging around Athens in the rain; the visceral anger felt by the Greek people is wholly understandable when you consider where exactly the bail-out fund they are paying for in fiscal punishments is set to go.
The vast majority of the fund will be used to ensure Greece’s banking system remains stable: €30 billion will be used as ‘sweeteners’ to help get private sector investors on board; €23 billion will be used to recapitalise Greek banks; and a further €35 billion will be used to buy back ECB bonds incurring a €5.7 billion interest fee.
So what does all this mean for the markets?
The Eurogroup of finance ministers has bought the Eurozone some time; Greece has avoided a messy default for now, and the markets can continue to propagate the cliché ‘ignorance is bliss.’ The Euro has posted muted gains against the Pound and the US Dollar, but the slight improvements more resemble daily fluctuations than a continental victory for the Euro.
You know that feeling you get when you really, really don’t want something to happen, but deep down you just know that it will. Like Germany beating England on penalties; corrupt politicians getting into power; JLS topping the album charts; your train being delayed; or US military involvement in the middle-east: EU leaders don’t want Greece to default but it’s still going to happen one day.
Smart investors will be preparing for a return to risk-averse trading as the Greek situation eventually fractures and the anaemic growth outlook for the global economy becomes apparent. The Pound to Euro Exchange Rate will ultimately get stronger, and the Euro to US Dollar Exchange Rate will deteriorate in due course.