3Q15
Greek Accord: A Defining Moment,
But Not the End of the Story
Highlights
Nicholas P. Sargen, PhD
Chief Economist
• Markets have rallied on news of a last-minute accord between Greece and
its creditors, which lessens the risk of a “Grexit.” A key difference from
previous negotiations is the requirement that the Greek government must
pass mandated legislation by July 15 to be eligible for a new bailout package.
• This requirement, if enacted, would lessen the risk of back-peddling by
Greece, and it also sets an important precedent for other countries that
encounter debt problems. That said, it’s questionable whether the latest
package will prove successful in transforming Greece’s economy.
• The negotiations are a defining moment for the eurozone, as it marked the first time a member country
was nearly expelled. As such, it sets an important precedent for other members, and it remains to be seen
whether it has permanently altered the eurozone.
• Amid these developments we have not altered our investment strategy, as we expect the fallout from Greece’s
problems to be limited.
Greek Drama: Down to the Wire (again)
For fans of video thrillers or Greek tragedies, it’s hard to imagine a script that contains more twists and turns
(including a surprise ending) than the negotiations between Greece and its creditors. Just a few weeks
ago, the creditors were willing to make concessions to the Greek government on a bailout package that
would enable it to service its pending debt obligations. Instead, President Tsipras lambasted the offer and
called for a referendum to demonstrate the public support it had to negotiate more favorable terms.
This action proved to be a gross miscalculation, as it infuriated the creditors and made them more determined
to dictate the terms for Greece to stay in the eurozone. The latest terms not only were much tougher than the
original ones, but they also required the Greek government to enact the mandated reforms within 72 hours to
be eligible for a new bailout package.
In doing so, Angela Merkel maintained that while she wanted to keep Greece in the eurozone, she would not do
so at any price, and Germany’s Finance Minister put forth a proposal whereby Greece could exit the eurozone
temporarily if it failed to pass the required legislation. According to press reports, negotiations between
Germany and Greece nearly broke down over a proposal to place Greece’s most valuable assets into a €50 billion
privatization fund managed by the EU. Marcus Walker of the Wall Street Journal summarized the significance
of these developments as follows: “Sunday’s statement on Greece by eurozone finance ministers will go down as
one of the most brutal diplomatic demarches in the history of the European Union, a bloc built to foster peace
and harmony that is now threatening one of its own with ruination unless it surrenders.” (WSJ, July 13, 2015)
The tough stance taken by the creditors should have two positive effects. First, it lessens the risk of back-peddling
by the Greek government. Second, it lessens the risk of other member countries following Greece’s example. From
this perspective, some observers contend the prospects for the eurozone have been strengthened, because the price
of exiting has been shown to be very steep.
At the same time, the question remains whether Greece will be able to service its debt in the future assuming it
adheres to the latest program. While Greece needs to embark on structural reforms of labor laws and the pension
system to make it competitive within the eurozone, the accompanying fiscal measures will weaken the economy in
the near-term when it already is in the grip of recession and the banking system is barely functioning. Therefore, I
am skeptical that the latest package represents a lasting solution to Greece’s problems.
Investment Implications
Amid this drama, we have not altered our investment strategy, mainly because we anticipated a last minute
agreement and also felt that the fallout from a “Grexit” could be contained. First, from a pure mathematical
standpoint, Greece’s economy is too small to have a material impact on the U.S. or other major world economies.
Secondly, on the financial side, the potential contagion due to defaults on Greek debt appear relatively small and
manageable. Furthermore, the ECB now has tools to manage through a Grexit scenario, and unlike 2010-2012,
Greek debt is now held mostly by public institutions that will not be forced to sell other assets to reduce risk.
In the end, we believe the main impact the Greek crisis will have is on investor confidence. Throughout the
twists and turns of the negotiations, investors responded favorably whenever it appeared Greece would stay in the
eurozone and negatively when the risk of a Grexit increased. The principal reason is the prospect of a Greek exit
raised the specter that political developments in countries such as Portugal, Spain, and Italy could increase the risk
of additional exits from the eurozone. However, in the wake of the decisive manner in which the EU leadership
acted, such concerns are likely to lessen. Therefore, we believe investor attention is now likely to shift away from
Europe and back to developments in the U.S. and other regions.
Past performance is not indicative of future results. This publication contains the current opinions of Fort Washington Investment Advisors, Inc.
Such opinions are subject to change without notice. This publication has been distributed for informational purposes only and should not be
considered as investment advice or a recommendation of any particular security, strategy, or investment product. Fort Washington or its affiliates
may from time to time provide advice with respect to acquiring, holding, or selling a position in the securities mentioned herein. Information
and statistics contained herein have been obtained from sources believed to be reliable but are not guaranteed to be accurate or complete. No
part of this publication may be reproduced in any form, or referred to in any other publication, without the express written permission of Fort
Washington Investment Advisors, Inc.
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