The deal everyone seems to hate is a step closer to becoming reality: Greece seems to have secured a short-term loan providing three months’ time to haggle over a third bailout. However, we sincerely doubt Greece is all of a sudden fixed and never to return to headlines. So use this opportunity to see that even as close as Greece was to exiting the euro lately, there isn’t evidence Greece poses an actual threat to the global economy.
Overnight Wednesday, Greek Prime Minister Alexis Tsipras managed to cobble together support from 229 of Parliament’s 300 members and pass the tough austerity measures required by the EU, IMF and ECB (the troika) as a precondition for a potential third bailout. To say this wasn’t exactly a broadly popular move is quite an understatement indeed. Violent protests erupted in front of Parliament. Thirty-two Syriza MPs voted “no,”[i] six abstained and one boycotted, leaving Tsipras with just 124 votes from his own coalition. Greek parliamentary procedures stipulate a government must secure at least 121 votes from its own bloc on major legislation to prove it hasn’t lost its mandate, so Tsipras was just four rebels away from a confidence vote. Many of the rebel MPs say they still support Tsipras and the government despite their rejection of bailout terms, and with a cabinet reshuffle underway, Tsipras should be able to hang on for the near term, but many suspect he’ll be forced to hold early elections sooner rather than later.
Meanwhile, the EU agreed in principle to provide Athens a €7.16 billion bridge loan from the European Financial Stabilization Mechanism (EFSM)—the EU’s (not eurozone’s) temporary bailout fund designed on the fly in 2010 to deal with Greece, Portugal and Ireland. As an arm of the EU, this fund includes contributions from non-eurozone nations like Britain and Denmark, both of which have ongoing notable anti-Brussels movements. This was thought to be a hurdle initially, but the eurozone effectively guaranteed non-euro countries they won’t be exposed to loss, winning their support.
Another hurdle was overcome when the 25-member Grand Commission of Finland’s Parliament—home to many lawmakers critical of extending added aid to Greece—approved the bridge loan and new talks on the third bailout. Friday morning, German lawmakers gave Chancellor Angela Merkel flowers to celebrate her 61st birthday. Then they got down to business, approving the bridge loan and talks, despite Finance Minister Wolfgang Schäuble’s comment that Greece’s best option was a plan to temporarily Grexit. Happy Birthday Angela, indeed!
In a press release Friday morning, the EFSM council formalized the bridge loan. The funds will let Greece clear its arrears with the IMF and make a €4.2 billion bond payment to the ECB Monday. The latter point was crucial, as many speculated missing Monday’s payment to the ECB would be the coup de grace pushing Greece out of the euro. After all, the ECB has propped up Greek banks for months. If they backed off, it would virtually ensure their collapse and the necessity for Greece to come up with an alternative currency.[ii]
Seemingly anticipating a deal, the ECB announced Thursday it would increase emergency liquidity to Greek banks for the first time in three weeks. This move led to the Greek government announcing banks would reopen Monday, although it will be far from business as usual. Capital controls remain in place with only a slight tweak permitting Greek citizens to withdraw their €60 daily maximum in the form of one weekly €420 withdrawal. Restrictions on money flowing out of Greece remain.
All this really means for investors is that the cycle of acute headlines looks to slow, for a few months at least.[iii] No one seems terribly happy with the deal presently on the table, and few seem to think it eliminates Greece’s issues. An IMF dossier suggests the institution will be hard-pressed to join the bailout party unless Greece receives massive debt relief or a 30-year grace period on payments. But EU treaties prohibit fiscal transfers between member-states, so an up-front reduction in Greece’s debt load seems unlikely. The troika and Greece will probably go round and round on this and other issues over the next several weeks.
So about all this week’s developments amount to is a temporary reprieve from the barrage of headlines claiming Greece is on the brink.[iv] Even if they finalize a deal, given Greece’s spotty track record on actually implementing reforms it signs on to—even those it passes in Parliament—we fully anticipate much more heated discussion of Grexit, fears of contagion, defaults and failed bailouts ahead. But it is worth remembering that in this go-round, when Greece was arguably closer than ever to Grexit, market-based contagion signs—to the eurozone or broader—were largely absent. Greek 10-year bond yields hit a year-to-date high of 18.7% on July 8—a level last seen in 2012, between the two Greek defaults that year. Portugal, Spain, Italy and Ireland, by contrast, saw peak yields of 3.2%, 2.4%, 2.4% and 1.8%—vastly lower than 2012 levels.[v] While the cost to ensure against a Greek default skyrocketed, the move didn’t repeat elsewhere in the currency bloc. And importantly, while the Greek economy seems likely to continue floundering, there are zero signs its weakness is harming Europe materially.
Absent contagion, Greece—about the size of Detroit, Michigan or Frankfurt, Germany economically—has no power to derail the bull market or economy. Those are the pertinent facts to remember when the next scene in the Great Greek Debt Drama opens, no matter how it closes.
[i] Including former Finance Minister Yanis Varoufakis, who published an annotated version of the agreement on his website—which, among other things, accused the troika of forcing Greece to fiscally waterboard itself—and denounced the deal as worse than the Treaty of Versailles in a scathing Parliamentary speech.
[ii] They may collapse anyway. And it is somewhat odd these banks will reopen before Greece has adopted the bank resolution blueprint common to the eurozone post-Cyprus, but that may just be a formality anyway.
[iii] Maybe, just maybe, this means we can stop spending several hundred words a week documenting the trials and tribulations in Athens. Probably not, but maybe.
[iv] We’re thankful for this, don’t get us wrong.
[v] FactSet, as of 7/17/2015. Maximum 10-year government bond yields, 12/31/2014 – 7/16/2015.