Bankinter analysts, in Madrid | This week is to be decisive for Greece. The technical team of the so-called troika of creditors (the IMF, European Union and European Central Bank) will return next Wednesday to Athens to see if the Greek government can clarify the figures it failed to make clear the previous week (this is why the troika left abruptly) and on Saturday, the euro group is meeting probably to decide what to do with Greece’s situation if the troika does not issue a favourable report for the coming disbursement (€8bn).
The Greek economy is contracting by approximately -7% versus -5% expecting the worst case scenario and that is socially unsustainable and unmanageable, this being the argument to consider that Greece, in the end, will give up and default or even leave the euro. This would clearly devaluate and breach international loan agreements, something that has happened in the past with Argentina and other countries. So far, Greece is running behind its own circumstances: it passed this weekend a new tax on real estate with which it could theoretically raise about €2bn and fill the €1.7bn gap, which was detected by the troika’s team 10 days ago. But the problem is social resistance, already toughened due to unemployment and economic contraction with no prospects of improvement in the next years. If it cannot redirect its own situation within weeks or days, its only way out is non-payment or voluntarily leave the euro to be able to devalue (debts would be redenominated into a resurrected drachma, regardless of what the loan agreements say) and, thus, be able to recover competitiveness via prices that would trigger growth and create jobs. We believe the most likely outcome is a severe haircut of around 70%, rather than an exit from the euro zone.
The accuracy of the Greek economic figures remains a major problem and makes Germany’s impatience understandable. Germany could, indeed, block the latest aid package or the next one, which would mean a point of no return. The paradox is, we believe, that looking at this outcome in the medium term, it would be good for Greece as the domestic economy would grow and create employment and, later on, strengthen the euro and even the EMU.
The only doubts are whether the banking system would resist and how to override the domino effect –it will not be easy. But, being where we are and after all we’ve been through during the last three years, what the markets (and everyone, actually) really needs is a move that will unblock the future. If Greece’s default or even its leaving the euro makes it easy, we would be free of drama.”