Fisher Investments Editorial Staff
Into Perspective, Investor Sentiment

Checking in on Greece

By, 02/17/2017
Ratings483.770833

Greece, known for historic landmarks, beautiful beaches and perennially contending for the Sick Man of Europe title, is back in the hot seat. If this were 2011, markets would be manic. Yet this time, while Greece’s latest bailout standoff stirred some headlines, markets are rather calm. People are getting over Greece, and once this latest episode sunsets, uncertainty should fall further. This echoes the broader theme of falling uncertainty in Europe this year, which stocks should enjoy.

When Greece gets bailouts—three since 2010—the EU and IMF dole out aid in installments, contingent on Greece fulfilling various reform and deficit conditions. When a tranche is due, the suits descend on Athens to check progress and negotiate with Greek leadership, which is usually behind the pace and loath to cut more, lest they anger the (already angry) populace. Cue a stalemate, jawboning, “Grexit” threats and a ticking clock, before they ultimately kick the can.

Past deadline days fell in mid-summer, and while it’s no different this year—Greece has a €6.3 billion payment due in July—the fireworks started earlier this round. Eurocrats want this all wrapped up soon, before the Dutch parliamentary election in March and ideally at a meeting this Monday. The EU reps want the IMF’s support, too,[i] but as usual, all sides remain far apart.

The first[ii] major issue is debt relief. Both Greece and the IMF say the Hellenic Republic’s debt load of 180% of GDP is untenable. However, Germany argues further reductions violate EU rules against fiscal transfers, as fellow governments own most of the debt. While they technically don’t have to decide this now, Greek leaders want a win and the EU wants the IMF on board, so it’s a hot issue.

The second bone of contention: whether to extend the “trigger mechanism”—which forces further austerity if Greece misses budget targets—past its current 2018 expiration. While Greek negotiators initially seemed amenable, new fears of missing targets have sparked refusals to accept “a single more euro of austerity.” While the EU and IMF agree Athens needs more fiscal reforms,[iii] like broadening the tax base and cutting pensions, Greece isn’t on board.

This drama is playing out like the typical Greek tragedy of recent past, with one critical difference: Markets have been rather unfazed. This isn’t 2011, when euro collapse fears fueled a global correction and a bear market in Europe. Even when Greece defaulted twice in 2012, global markets had a banner year. Nothing about this seven-year saga surprises markets anymore, as evidenced by a similar ho-hum reaction to events last year.

Whether Greece kicks the can again or threefaults and finally bounces from the euro, stocks got over this a long time ago. With GDP of €175.7 billion, Greece comprises just 1.7% of the eurozone economy and 0.3% of the world.[iv] Moreover, the potential negative spillover from a Grexit would be minimal, as private foreign banks have little exposure to Greek debt. An orderly Grexit may even be cathartic, proving once and for all the fears were baseless. Ending the will-they-or-won’t-they game could end uncertainty and allow everyone to finally move on.

This is emblematic of what we expect to be Europe’s “year of falling uncertainty.” Like America (presidential election) and Britain (Brexit referendum) last year, Europe has started 2017 nervous over elections in Germany, France and the Netherlands, along with this little Greek drama. However, as these events come and go, uncertainty should fade, giving investors a clearer view of Europe’s solid economic fundamentals. This should allow sentiment to warm and markets to melt up, echoing the US and UK last year.

 

[i] At press time, an unsourced Der Spiegel report suggested the IMF might contribute €5 billion to the bailout fund, but it’s all very up in the air.

[ii] This list isn’t comprehensive. But you don’t want to read an article that long.

[iii] Ignoring debt interest payments.

[iv] Sources: FactSet and International Monetary Fund, as of 2/17/2017. All figures are for calendar year 2015 due to data availability and use nominal GDP.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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