Greece’s Bailout Negotiations

Over the past few months, uncertainty over the future of the Eurozone has mounted following fears of a Greek exit (‘Grexit’).

Although not a hugely significant member of the Eurozone, any departure from the Euro would highlight the underlying fragility of the monetary union and might lead to further exits and inevitable collapse of the currency. Market sentiment has been badly affected as a result of Europe’s problems which, for many investors, will spark an investment opportunity. On Friday (20 February) a four month bailout extension was agreed which will help fade the Greece saga – at least for now – and the market can concentrate on Mario Draghi’s quantitative easing (QE) program which starts this month.

Problems in Greece

• Unemployment 25% (Youth 50%).
• Debt 175% of GDP.
• 240bn of borrowings from EU, ECB and IMF.

Following the agreement of a four month bailout extension, the Greek cabinet is drawing up a list of budget cuts and structural economic reforms, such as deregulation and anti-tax evasion measures, which must be approved before the bailout extension can be ratified.

It is essential for Greece that the deal progresses, as a collapse would re-open worries of a Eurozone departure, which would have catastrophic implications for Greece itself. It would lead to the re-adoption of the Drachma, which would be devalued by at least 50%, causing inflation. This would lead to a hike in interest rates, making borrowing significantly more expensive. Furthermore, leaving the euro would cause Greece to lose its reference point of stability and become cut off from capital markets.

Following the deal, the Greek Prime Minister, Alexis Tspiras, said they had ‘won a battle, not the war’ and that there is a long and difficult road ahead.

  

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