[credit provider=”AP/Nikolas Glakoumidis”]
Greece is having a really tough week. Stocks are down 11.6 per cent, and bonds have been selling off over the past few days after a strong rally over the past few weeks.The government released its 2013 budget yesterday, and the numbers were dismal. The budget projects a debt-to-GDP ratio of 189.1 per cent in 2013. Troika creditors are trying to bring that number down to 120 per cent by 2020, and that goal is looking less and less attainable with each new revision.
Now, Greece must agree on controversial labour reforms demanded by the troika before the Eurogroup meeting of finance ministers and completion of the troika review on November 12 – but there is uncertainty over whether that can happen.
An opposition party, the Democratic Left, has stated that they will not support the reforms.
The majority coalition between Greek PM Samaras’ New Democracy party and PASOK should have enough votes to push through the reforms, but one MP, Michalis Kassis, just abandoned PASOK in opposition to the vote.
The ruling coalition retains enough votes to push through the remaining cost cuts, revenue hikes and labour reforms next week even without support from the third ruling party, the Democratic Left, whose 16 deputies oppose the labour moves.
But any further defections from PASOK over the reforms could leave the government facing an unpredictable vote. Most PASOK deputies said after a meeting late on Wednesday that they would support the new austerity package but five party lawmakers, including Kassis, had yet to be convinced to do so.
And the big decisions on the disbursement of the next tranche of aid to Greece are expected in less than two weeks.
That sets the stage for a tense next few days.
Societe Generale’s Vincent Chaigneau says that ultimately, a deal is expected, and suggests that Merkel could wrap it up politically into a larger deal involving Cyprus and Spain:
The Greek government is testing the troika’s patience yet again. But the stakes are high – a Greek exit would be so painful for all parties – and a last-minute agreement is more likely than not. Meanwhile, Cyprus is said to be close to reaching an agreement with the Troika. Decisive progress on both Cyprus and Greece would move Spain closer to launching a request for help (if Merkel intends to bring the cases for Greece, Cyprus and Spain to the Bundestag all together). This, for us, remains the next big market mover.
Another SocGen strategist, Ciarán O’Hagan agrees that while the next few weeks could be volatile, ultimately a deal will be put together.
O’Hagan even says that Greece will move off centre stage for a long time:
So the stakes are high. We expect that the carrot of a positive sum game will win out in the end, rather than mutually assured destruction. We are thus looking for a cessation of hostilities over Greece’s future, maybe not by the 12 November, but at some stage into year-end. That will open up a two to three-year period in which we can put Greece onto the back burner. In turn, our preferred scenario for Greece would provide relief for other euro area peripherals.
While a new deal with the troika will provide Greece some much-needed cash in the short term, it does little to address the debt sustainability issues that have been made so glaringly obvious in Greece’s 2013 budget yesterday.
Citi economists, who are some of the most bearish toward Greece on the Street, wrote in their latest monthly update:
The failure of Greece’s programme to restore the country to fiscal sustainability largely reflects the collapse in economic activity and the absence of any meaningful structural reform since the early success with pension reforms. Greece has implemented the biggest cuts in nominal government spending of any country in an IMF GRA programme in recent years. However, nominal GDP has already fallen by 13% since Greece’s first programme began and the IMF expects that even in 2016, nominal GDP will be 12% below the pre-programme (ie 2009) level. This is by far the biggest collapse in nominal GDP seen in any country in an IMF GRA programme in recent years. Portugal probably will fare only a little better.
So, while the next few weeks may provide some excitement, the country will likely face continued deterioration going forward.
The latest manufacturing data out this morning is not encouraging, either.