Creditors are lending Greece to repay themselves
This fact goes largely unsaid; most of the funds that Greece will get from an agreement will go straight back to the creditors. Greece has a debt to GDP ratio of 180 percent or €320 billion (all figures are a moving target).
A significant part of this debt is owned by Eurozone governments. As at the end of 2014 these countries held 61.5% of Greek debt through bilateral loans and the European Financial Stability Facility. Thus extension of the current agreement will mean that most new loans from these countries will be used by Greece to repay these countries.
This will go on and on and on until it becomes politically acceptable to wipe out the debt. Politically acceptable probably means Greece becoming more responsible and more ‘European’ economically. SYRIZA to date have failed to live up to what is expected.
Malta is the country most exposed to Greece
In nominal terms Germany is the country with the largest exposure to Greece at over €60 Billion. However, in percentage terms Malta ranks top at over 3 per cent of GDP. A Greek default would practically wipe out a year’s growth from the Maltese economy.
Why focus on a primary surplus
Part of the discussion revolves around the primary budget. A primary surplus is a budget surplus before interest payments. Many question the sense in pushing for primary surplus when common sense dictates that Greece’s total deficit should be the benchmark.
Greece’ main problem today is its massive debt. Improvement in its primary budget is an indicator of an improving economy; an economy that is collecting more taxes then it is spending. Greece’s massive debt problem will have to be tackled at some point; creditors have already shown flexibility in restructuring debt. Syriza’s bickering style has probably made such future restructuring politically more difficult.
1970’s economics
SYRIZA’s economic policy direction is also out of tune with the EU policy direction. The Greek government has suggested that it is willing to increase taxes on successful business and individuals in order to maintain its unrealistic social policy; Greek’s have an option of retiring early. Over 30 per cent retire before the age of 55, a few even retire before 30. I would be surprised if creditors accept Greece’s proposal at face value.
It is all symbolic
A Greece default is manageable… if contained. Greece’s possible exit from the euro zone will be a symbol of how far the EU community will go towards maintaining monetary union. Ultimately other debt-ridden countries, currently silent on the sidelines, will evaluate whether it pays to remain subject to the big guys or to revert to an original currency, inflate their way out of trouble, and sail off into eternal economic mediocrity.
Disclaimer: This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.