Greece: Don’t get too excited over the deal – BMO CM

Stephen Gallo, European Head of  FX Strategy at BMO Capital Markets, explains that Greece made front page news last week as after six months of discussions, a deal on a package of reforms was reached with its creditors, which should allow for more bailout funds to be disbursed ahead of a €6-to-€7 bln debt re-payment due in July.

Key Quotes

“And, the Eurogroup will likely approve the deal on May 22nd. But keep the following in mind. The Greek parliament must approve these measures; likely to happen given that the governing coalition has a majority. However, New Democracy is opposed and they are the 2nd largest party in the parliament. The next sticking point is the IMF’s unwillingness to participate in the 3rd bailout, and German involvement is dependent on the IMF’s participation. As it stands, Germany is not keen (remember there is also an election there this fall so officials have to face voters), but they do acknowledge that the agreement was “an important step forward”.”

“So what’s new? After all, Greece and its Eurozone creditors were already in agreement (in principle) on what must be done to unlock new bailout funds (such as opening up the energy market, cutting state pensions, lifting the personal income tax threshold, and broadening the tax base) and Greece was set to start legislating these measures this month. However, further IMF involvement and the government’s commitment to implement the reforms have always been conditional on the Eurozone’s agreement to debt relief measures. Here, there has been no progress whatsoever and that is the major sticking point. Moreover, the Eurozone is not budging on its demands for Greece to maintain a 3.5% of GDP primary surplus for years after the current bailout ends in 2018, which the IMF and Greece see as economically and socially impossible.”

“The positive takeaway is that the most pressing area of disagreement is now between the IMF and the Eurozone, not with the Greek government. But, don’t expect the impasse to be fully resolved at the May 22nd meeting. The IMF may agree to be temporarily involved in the 3rd bailout, or the Eurozone may go it alone until after the German elections, before restarting discussions with the IMF. Given the limited appetite for austerity in Greece and the difficult debt relief talks ahead, the chances of a further Greek impasse colliding with other Eurozone political risks over the medium-term are high— particularly regarding Italy. Although the euro is likely to remain resilient in the shortrun, we expect a move lower towards $1.05 in nine months as those risks crystalize.”