London: After months of brinksmanship, Greece and Eurozone finance ministers have agreed to a second bailout, and now analysts around the world are picking through the details to try to determine what it means.
Of course, the biggest question for us is what this means, if anything, for India.
The meaning for Greece is clear: Extreme, real pain for the Greek people, for years to come. A leaked report marked “Strictly Confidential” but obtained by the Financial Times estimates the Greek economy might return to growth in 2015. You can read the full report on the bearish blog, Zero Hedge.
The report questions whether Greeks will politically support this extreme pain over the next years.
As The Economist wrote: “The politics of imposing a near protectorate on Greece may turn yet more poisonous.” Greeks have already been burning German flags in protest.
European negotiators might be cheering finally agreeing to a deal, but serious doubts remain if this is a real solution or yet another short term fix. Greece might dodge default next month, but the report also sees the possibility of another bail-out needed. The Eurozone isn’t out of the woods yet.
After months of brinksmanship, Greece and Eurozone finance ministers have agreed to a second bailout, and now analysts around the world are picking through the details to try to determine what it means. AFP
Will the bailout work?
This bailout is now following a pattern that we’ve seen with the previous short-term solutions. After taking the Eurozone to the edge of disaster, traders express relief, but that relief is short-lived.
The markets had priced in that a deal would be struck, but they still have doubts that the deal will actually make Greece’s debt more manageable.
The leaked report even casts doubt on whether this bailout will actually meet its target of reducing Greece’s debt burden to 120% of GDP by 2020, the target set by the International Monetary Fund. The report looked at one scenario taking into account potentially less rosy models, a “tailored downside scenario”. This scenario saw Greece’s debt falling only to 160% of debt by 2020.
In that case, Greece would need another €75 bn on top of what is forecast in this bailout package.
If growth didn’t return by 2015 or there were delays in implementing the program, the debt targets wouldn’t be reached until closer to 2030.
Zero Hedge casts doubt on the economic projections contained in the report:
“the downside case assumes — 1.0% GDP decline in 2013. As a reminder, in Q4 Greek GDP imploded by —7%! Somehow we are to believe that within a year, the country will not only turn around its economy, which is foundering courtesy of infinite austerity and striking tax collectors, but almost generate growth???”
The Wall Street Journal collected response from analysts at a number of major banks. HSBC triumphantly proclaimed that the conspiracy theorists who saw a Greek default and an exit from the Eurozone were proven wrong. HSBC said, “overall, this is a win for the bulls”. That was the most optimistic response by far. Barclays Capital and Citigroup were much more cautious in their responses, sayindg that any upside was already priced in and that doubts still remained.
BarCap analysts said that “an orderly Greek default cannot be completely ruled out”, and echoing the leaked report, Citigroup analysts said, “there are uncertainties remaining with respect to implementation and how it will play out”.
What it means for India
For India, most analysts see a limited impact from the ongoing eurozone crisis. Of the BRIC countries, India is the most domestically focused of the four large emerging economies.
However, that doesn’t mean that India is completely insulated from the ongoing turmoil in Europe. In the deal announced on Tuesday, creditors will take an even larger ‘haircut’ on Greek debt, seeing their returns reduced by up to 75%. It will take time for the banks to absorb the losses, and in the meantime, they will have to reduce lending to meet new higher reserve requirements.
The European Union is also India’s biggest foreign market, accounting for 20% of India’s total exports. Greece only accounts for 2% of the economic output of the eurozone, but major economies in the eurozone are already suffering. Italy has already fallen into recession. Spain is battling crippling unemployment.
No economy is isolated, and this latest attempt to deal with the eurozone crisis means a lot of short-term pain for countries in the zone, not just Greece. India won’t feel the pain as severely as other countries in the EZ, but it won’t escape unscathed.
