Greece still remains a threat to the Eurozone

“The short term measures aimed to reduce the public debt is a success” SYRIZA’s Political Council has announced but has excluded the possibility of voting new measures after 2018.

GREECE AND ITALY-WSJ

Not for the first time this year, the doom-mongers have been confounded. The Italian referendum over the weekend resulted in aresounding defeat for Prime Minister Matteo Renzi, who promptly announced his resignation. Yet the sky didn’t fall in, the euro dipped and then rallied, and Italian bonds and bank stocks barely budged. Other European assets were also largely unmoved.
Why didn’t markets react how some had feared—and those who dream of the failure of the European project had hoped? One answer is that Mr. Renzi’s defeat was in the price: Markets had anticipated it. Another explanation is that the referendum, like the Brexit vote and the election of Donald Trump, doesn’t in itself change anything.Political consequences can and will follow from the decision, but it is too early to say what these will be and the markets will wait to assess them.
But the main reason Europe isn’t now in turmoil is that Italy’s problems are likely—for now, at least—to stay in Italy. These problems are hardly new and reflect a long-running crisis of domestic governance.
Τhe most urgent test of the eurozone’s decision-taking capacity isn’t Italy but Greece. Italy will only become a eurozone problem if it is forced to ask the eurozone for aid, which seems unlikely while the ECB continues to buy its bonds. But the risk of a new Greek crisis is real unless the eurozone can find a way to break a longstanding impasse among Greece, Germany and the International Monetary Fund over the next phase of Greece’s bailout, the Wall Street Journal adds.

Meanwhile, the growing strength of populist parties in national parliaments is reducing the political scope for action at both the national and EU level that might put the eurozone on a more stable footing. For years, the EU has comforted itself with the notion that it only ever moves forward in a crisis. But this isn’t just an unsatisfactory way to govern anything—it may no longer even be true.
Viewed this way, the most urgent test of the eurozone’s decision-taking capacity isn’t Italy but Greece. Italy will only become a eurozone problem if it is forced to ask the eurozone for aid, which seems unlikely while the ECB continues to buy its bonds. But therisk of a new Greek crisis is real unless the eurozone can find a way to break a longstanding impasse among Greece, Germany and the International Monetary Fund over the next phase of Greece’s bailout.
Germany has said it won’t disburse any more cash unless the IMF joins the program. The IMF won’t join the program until the eurozone agrees to put Greece’s debt on a sustainable footing, but the eurozone won’t know how much debt relief Greece needs until Athens and its creditors agree on what Greece’s long-term budget targets should be—and the policies to deliver them. If a deal isn’t struck quickly, before the eurozone enters an extended cycle of national elections, the next opportunity might not arise before the summer, by which point Greece is likely to once again face liquidity pressures, undermining the current bailout program.

MORGAN STANLEY

An analysis by Morgan Stanley sees the country’s economy stabilizing and returning to growth faster than previously projected. However, it notes, despite the rebound, growth prospects are not yet sustainable.
Morgan Stanley economists say the Greek economy “has started to leave the economic crisis behind it”.
“GDP will generally remain stable this year – compared to our previous estimates for a 1% drop yoy – and it should grow by approximately 1.8% in 2017 or 0.7% more than we previously anticipated”.
The report sees the Greek economy growing even further in 2018 as prospects and market conditions improve.
“Our first estimate for 2018 for growth above 2%. The bond market has so far reacted quite well to this incremental normalization of the macroeconomic situation, with the 10 year bond yield dropping initially by 150 base points. However, austerity – although gradually decreasing – and political instability are still substantial and viable growth continues to be elusive. In the context of strict austerity time will be needed before a “real” normalization and growth”.

RISK

Morgan Stanley also points to political risks and the questions that must be answered by the country’s financial team.
“The Greek economy has returned to growth in the past, allowing the country to regain access to bond markets. Therefore, it is surely not the first time that GDP is picking up pace – or so it seems – and market conditions are improving. The question therefore is what could support growth. This seems to be the key question long term”.
“But there is a better question still: Where will growth come from in the short term? This is more important because in the next many quarters growth will not depend so much on specific sectors driving recovery, such as structural changes on the supply side of the economy, where demand will come from, etc”.
“All these things will gradually become all the more important. The first part of GDP recovery though – the first increase by 10 percentage points after a 25% drop – will come from the lifting of restrictions such as capital controls, lack of funding, accumulation of State arrears, political uncertainty, etc.”.

QE

“Greece must wait, possible until after the German elections next year, form more maturity extensions, namely another dose of debt re-profiling. In spite of short term debt relief (decided at the 5 December Eurogroup meeting), without significantly larger debt maturity extension and grace periods, the role of the IMF will probably remain uncertain and, more importantly, the debt trajectory may not be manageable, thus risking the postponement of the inclusion of Greek bonds in the European Central Bank (ECB) quantitative easing (QE) scheme at the end of 2017 or even at the end of the bailout program in 2018. But, because the ECB will have already started to turn off the QE tap, there could be little time left for the ECB to acquire Greek government bonds.”