Hold the front page.
The latest bout of panic over Greece has resulted in yet another rabbit being pulled out of an apparently bottomless hat. Who’d have thought it?
So is there any prospect of an end to this interminable saga?
Sadly, I doubt it…
Greece finally brings something to the table
Yesterday, Athens “presented its first substantial concessions in months of fruitless negotiations”, notes the FT. It was delivered in the style we’ve become accustomed to seeing from the Greeks – “The Greek submission only arrived on Monday morning, after Athens accidentally sent the wrong draft on Sunday night”.
Wilful intransigence, honest cock-up, or slippery negotiating tactic? The fact that any of those could be true rather points to the basic problem here. You’re trying to reform an essentially incompetent economy that doesn’t want to be reformed.
But markets, of course, loved it. Any excuse for a bit of irrational exuberance. The Athens stockmarket gained around 9%, and Greek bond yields fell. Other eurozone stockmarkets rose too.
So what are the Greeks promising now?
Put simply, the two sides are arguing over the sustainability of the Greek public finances. Greece needs to spend less and generate more in tax revenues. This isn’t really so that it can pay back its debts – that seems highly unlikely. It’s more about putting it on some sort of long-term sustainable path so that its creditors don’t feel they are just chucking good money after bad by bailing it out.
The question is how to do this. The two sides are mainly arguing over pension reforms and VAT changes. The main area of progress has been on pensions – Greece is suggesting changes to the pension system that would reduce its cost by 0.4% of GDP this year, and around 1% next year. It’s not reducing benefits – instead it’s shifting more of the burden to employees and employers, so that they have to make bigger contributions to pension pots. Also, the retirement age will be raised gradually to 67 by 2025 (by which point I fully expect our own retirement age here in the UK will be at least 70).
Meanwhile, a higher rate of VAT will apply to more goods. Like the pension changes, this falls short of creditors’ hopes, but new bands of corporate tax will make up the shortfall.
In short, where possible, the Greeks have opted for higher taxes rather than lower public spending. That doesn’t sound too different from the way things run currently. A member of the Greek parliament, writing in the FT, describes Greece’s problems like so: “The private sector was essentially strangled by red tape and rampant corruption. Finding a cosy job in the public sector was more appealing and rewarding than setting up your own business.”
Will Greece seal the deal?
But let’s ignore the sustainability of this model for the moment. The question is, will this be enough to convince Europe to unlock the next batch of bailout money for Greece?
Markets seem to think so. Eurozone stocks saw their biggest gains since summer 2012, which was when European Central Bank boss Mario Draghi did his big “whatever it takes” speech that ‘saved’ the euro.
And eurozone leaders spoke optimistically – it’s a “positive step”, said one. They’re now all going to meet up on Wednesday to see if they can come to a final agreement.
There are still plenty of hurdles to clear. For a start, Greek leader Alexis Tsipras will need to get the backing for any deal from the Greek parliament. That won’t be easy.
But overall, it does look increasingly as though the safe bet – never underestimate the ability of the eurozone to fudge in the face of adversity – is the right one to make.
That said, even if a deal is done, you have to wonder if the Greek economy will ever be able to reach a point where it’s ‘saved’. So many Greek citizens and companies have swept their money out of the banking system – can they ever have faith in it again?
According to JPMorgan, Greece’s bank deposit to GDP ratio is 66%. That compares to a eurozone average of 94%. Without the support of the European Central Bank (ECB), the Greek banking system would already have collapsed. Fudge can only get you so far. It’d take something a lot more definitive to get the Greek question off the table for good.
In the meantime, what does this mean for investors? I’m happy to stick with eurozone stocks – the German index in particular has had a chunky correction and looks like it’s bouncing back now.
We’ll have more on the Greek situation in MoneyWeek magazine this week, out on Friday.
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