EuropeanJul 21 2015

Bailout does not allay ‘Grexit’ fears

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Bailout does not allay ‘Grexit’ fears

The Greek bailout deal may have saved the country from crashing out of the eurozone for now, but economists warn the move does not eliminate the prospect of a future exit.

The ongoing saga between Greece and its eurozone creditors appeared to be in its final stages after an €86bn (£60bn) rescue package was agreed last week.

Greek prime minister Alexis Tsipras was able to secure parliament’s blessing for the deal, albeit only narrowly avoiding an embarrassing defeat at the vote.

Meanwhile, German chancellor Angela Merkel successfully pushed her country’s MPs to ratify the rescue package on Friday.

But economists warned the deal did not provide a sustainable foundation on which Greece could pull itself out of depression, especially given the fragile state of its banking system and high government bond yields.

Schroders European economist Azad Zangana said while the short-term chances of a Greek exit from the eurozone were 10-20 per cent, he thought it would be “more like 50 per cent or higher” in the medium term.

Subitha Subramaniam, chief economist at Sarasin & Partners, agreed. “Greece is not sustainable,” she said.

“Its debt-to-GDP ratio is going to be 200 per cent in the next two years.”

The deal has taken the risk of a Greek exit “off the market’s worry list for a while”, Royal London Asset Management economist Ian Kernohan added, but it had not done so permanently.

Fidelity global economist Anna Stupnytska said it was likely Greece would leave the eurozone in the next five years.

“It is possible for Greece to be a success, but given the political backdrop there I don’t think it can happen – it will become unsustainable,” she said.

The political angle was also picked up by Ms Subramaniam and Mr Zangana, who thought the success of any deal would depend on whether Mr Tsipras could follow through with what he had promised to do and maintain power.

His party won the country’s recent election largely due to its anti-austerity stance. However, Mr Tsipras appears to have bowed to the country’s creditors.

“It all depends on what kind of governing structure we have in Greece and whether it will last,” Ms Subramaniam said.

“Will Mr Tsipras enact all these reform measures and stay the course?”

Looking back on his short term, Mr Zangana said the prime minister had led the Greek economy to disaster.

“Greece was one of the fastest-growing economies and was progressing nicely to achieve its next bailout,” Mr Zangana said.

“Mr Tsipras defeated all the progress it had made and now Greece is definitely back in recession and deficit.”

While commentators have suggested the deal was stricter than previous offers, it did at least allow Greece to make debt repayments due this month and next.

Mr Tsipras has agreed to sequestrate €50bn of Greek assets and put them into a special Athens-based fund.

The prime minister also accepted plans for a high level of domestic economic supervision by the bailout monitors, including the International Monetary Fund, as well as a public administration overhaul overseen by the European Commission.

However, the country was given a fillip late last week when European Central Bank president Mario Draghi affirmed his faith in Greece remaining in the euro by raising the bank’s limit on emergency loans to Greek banks by €900m in one week.

Harsh rescue package could lead to ‘vote of no confidence’ in Tsipras

Accepting the latest bailout deal puts prime minister Alexis Tsipras at risk and could bring a coalition government back to Greece, Schroders European economist Azad Zangana says.

By agreeing to the harsh rescue package, Mr Tsipras has gone back on his promise of anti-austerity.

His finance minister, Yanis Varoufakis, has already left the cabinet.

Mr Zangana said: “I wouldn’t be surprised if there was a vote of no confidence and he steps down within the year.”

If this were the case the government would return to a grand coalition, the state it was in before Mr Tsipras was elected.

He said this situation “could be better”, since it would “send a better signal to outside investors that the government was uniting”.

But Mr Zangana added that such a government would be “less stable”, though he would still rather see Mr Tsipras go.

“He isn’t very credible; he clearly still opposes [the eurozone] and he is not going to be trusted,” he said.