Beyond Bulls & Bears

Greek Drama Extends Its Run

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Greece’s debt problems have retaken center stage, as payment deadlines approach and negotiations with creditors continue. The money-strapped country and Syriza, its radical left-wing ruling party, are back in the headlines and on the minds of investors, as predictions that Greece could leave the eurozone abound. David Zahn, head of European Fixed Income, Franklin Templeton Fixed Income Group, offers his perspective on Greece’s dramatic debt saga, as well as the orderly beginning of the European Central Bank’s quantitative easing programme.

David Zahn
David Zahn

David Zahn, CFA, FRM
Head of European Fixed Income
Senior Vice President
Franklin Templeton Fixed Income Group

As Greece’s debt drama continues to unwind, some observers are predicting the country could default on its €315 billion owed, leave the eurozone—or both. Greece’s departure from the currency bloc would probably be more of an emotional than an economic tragedy for the region, in my opinion. Greece is very much a Greek problem, in my view, and its exit from the eurozone would likely be very detrimental to Greece’s economy.

I think, however, there is room for compromise between Greece and its creditors, since Greek Finance Minister Yanis Varoufakis has said his country will meet all of its financial obligations. Greece’s Ministry of Finance upheld that promise on 9 April when it made a €460 million payment to the International Monetary Fund (IMF). The Greek government had to meet the payment deadline to continue negotiating with the IMF and eurozone finance ministries for another bailout package that would keep the country afloat—for the time being. While the Greek government is seeking additional funds and loan concessions, IMF and eurozone representatives are pushing for spending cuts and tax increases. The Greek government hopes to reach an agreement at a 24 April meeting with the eurozone finance ministers. If representatives of Syriza, the government’s ruling party, come to the table and actually negotiate, I think their creditors would be happy to have a reasonable discussion, but in my view, they are not likely to allow the Greeks to write off any debt.

If Greece defaults and/or leaves the eurozone, I don’t think it will have a long-term effect on the eurozone’s debt markets, although we’d expect to see some short-term volatility as the situation unfolds. Unlike several years ago, the majority of Greece’s €315 billion debt is now owned by public entities; so we’d anticipate that any fallout would be contained primarily in public institutions such as the IMF and the European Central Bank (ECB).

Party On?

While I think Greece’s potential exit from the eurozone stage would not likely have long-term effects on other countries in the region, its political influence has grown since the election of ruling party Syriza earlier this year.

Syriza is the first extremist party Europe has seen in many years that says it wants to completely reverse what its country’s previous government had done. In Syriza’s case, for example, it campaigned on a promise to end the former administration’s austerity programmes. While Syriza leans far left, its victory seemed, in the short term, to have boosted extremist parties on both ends of the political spectrum in countries such as France and Spain.

Since gaining power, however, Syriza has not been able to deliver as much as it had promised, such as adding thousands of jobs to the economy and writing off most of the country’s debt. Instead, Syriza has had to backtrack and move towards what the previous Greek government was doing. In turn, we see that support for some fringe parties has declined throughout the region recently. In France, for example, Marine Le Pen’s anti-euro, far-right National Front party gained a respectable 26% of the vote in last month’s local elections, but it didn’t emerge as the top party as had been predicted. And in Spain, the anti-austerity Podemos (We Can) party recently suffered setbacks in the polls after riding high for a number of months.

If the Syriza party can do what it has promised to do, I think extremist parties will probably become much more popular across Europe. However, if Syriza representatives end up reneging on their promises and do not get nearly as much done, I think it will probably mean that we could see a continued drop in the polls for some extremist parties throughout the eurozone.

QE Premieres

In contrast to Greece’s theatrics, the ECB’s much-anticipated €1.1 trillion quantitative easing (QE) programme began calmly last month. The ECB has announced that it is ahead of schedule to spend its promised monthly target of €60 billion. I think it’s important that the ECB spends exactly €60 billion for the first several months at least, because it needs to ensure that its QE programme succeeds. And, fortunately, there doesn’t seem to be any scarcity of bonds, as was feared when some holders of government securities said they were not going to sell them. The ECB has been able to buy bonds quite readily to carry out its QE programme, and they are not creating any major distortions in the market at the moment. I think, overall, the ECB’s QE programme—which is just in its first month—is headed down the right road so far.

That said, QE plays just one part in the eurozone’s recovery story. I believe continued reform is needed at the government level, as is structural reform in the labour markets. I think countries within the eurozone also should lift some of their controls to allow their economies to be freer, which would encourage growth, because Europe doesn’t have a high-growth potential at the moment. Growth is quite low in Europe, even though it’s slightly more positive than in the fourth quarter of last year. I think QE will allow the economies some breathing room, which could help smooth the way for reform, but that will take time.

The comments, opinions and analyses are the personal views expressed by the investment manager and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice, and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

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