‘Memorandum exit’ does not convince markets

It may be that 20 August is considered an historic day for Greece, as for some it signals the end of the memorandums, or the end of the era when Greece was a de facto EU colony, as Politico observes. Yet, for a large segment of the markets, there is not much reason for celebration, as the ‘great exit’ is considered largely symbolic.

The yield of the 10-year bond on 20 August was 4.324 percent, at about the same level as on August 17, which is a nearly two-month high, and quite a distance from the beginning of the year, when it was 3.6 percent.

The difference in the yield of the Greek and German bond, which serves as a benchmark for the eurozone, is around 402 basis points, having increased by 60 basis points since the end of July. At the same time, the five-year bond yield is at a two-month high, exceeding 3.31 percent.

For analysts, Greece must regain the trust of the markets at a time when the international environment is not supportive of Greek bonds, which remain vulnerable in a potential international crisis, as evidenced by the pressures exerted by the Turkish crisis and the recent tumult in Italy. Greek bonds, they say, will continue to be affected by the tumult in neighbouring countries. Although Greece is not exposed, it is considered the weakest link.

The Greek economy showed growth for the fifth consecutive quarter, tourism is doing well, and unemployment has begun to recede to 19.5 percent, compared to 28 percent at the peak of the crisis.

Still, the IMF and international remain cautious, and speak of foreign and domestic dangers of a decline. The twin budget and trade deficits may have disappeared, yet fiscal imbalances have been shifted to the balance sheets in the private sector.

Greece’s Odyssey does not appear to be over, as public finances are a way off from normalcy, and there is a way to go in the country’s marathon.

Greece remains hugely over-indebted, as the 240bn euro debt to the formal sector combined with the debt to the private sector has raised the debt to 180 percent of GDP.

In the next decades, even based on the optimistic scenario, Greece will have to borrow hundreds of billions of euros from the private sector so as to pay off its official creditors. If those investors judge that the debt of the government is out of control, they will turn their backs on Greece, and European leaders will be confronted with yet another Greek crisis.

As “cheap debt”, with low interest rates, to official creditors is replaced by “expensive debt” to the markets, the debt dynamic can once again be derailed.

For some, Greece was saved in the sense that it averted the Armageddon of a Grexit, but the manner in which it was saved is so disadvantageous that one cannot speak of true salvation or an exit from the crisis.

The country has inadequate public services, very high tax rates high unemployment, weak institutional organs, and miserable demographics (500,000 highly educated Greeks abandoned the country), and must achieve huge primary surpluses for the next 40 years.