A return to the drachma for Greece is unlikely, say market experts, who instead predict that Europe will continue to procrastinate on a final solution for the country’s debt problems.
Speaking at an event hosted by the Hellenic American Bankers Association (HABA) in New York last week, Bob Savage, CEO of CCTrack Solutions, and Phil Simotas, a portfolio manager at IKOS, both agreed that a compromise between Greece and its European debtors is likely to be agreed that will delay any final resolution on its debts.
“The primary surplus that Greece has is a tenuous one but it’s there and it’s the only reason why it can actually have negotiations,” said Savage. “Greece can live without Europe; they could theoretically continue on their own path, go back to a drachma and live. Is it a good thing? No. Does it have terrible affects on Europe? Yes. Will it destroy the banking systems and send Greece into a recession? Most likely, yes.
“It’s hard for me to imagine that people would want to do that unless they’re forced to. But that’s not the way that Europe works, I think they will find a compromise and kick the can down the road, as they have done in this crisis since 2009,” he continued.
Simotas concurred, adding that the manner in which the Eurozone has handled Greek debt since 2012 has enabled it to avoid any final resolution to the country’s debt problems.
“In the first Greek crisis that erupted a couple ago a lot of the country’s bonds were held by the private sector. This created a big issue because a lot of European banks in places like Italy and France had this on their balance sheet, and therefore if Greece had defaulted it would have left a big hole in the Europe’ balance sheet,” he explained. “So one of the things that’s happened over the last two year is that the Eurozone, through its policies, has shifted all that debt from private sector balance sheets to the ECB and the public sector. In doing this they’ve driven down the yields on Greek debt.
“As a result of this, the reaction in the Greek government bond market has been much more controlled this time round. Has it helped solve the problem? No, the problem is still there. But it makes sailing through this or kicking the can down the road a little bit easier,” he added.
Savage and Simotas were speaking on Thursday evening in New York and the following day it was announced that Greece had negotiated a four-month extension to the country’s bailout, provided it produced a list of reforms for Europe to agree upon by Monday 23 February.
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