Update on the world’s economic headache…Greece
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2012
Thu
16
Feb
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The world remained on the edge of its seat last week as Greek officials continued to play cat and mouse with the ‘troika’ (ECB, IMF and European Union). “Markets were eagerly awaiting the outcome of this now global issue, as it affects all investment parties in some manner or other,” says Paul Stewart, managing director of Plexus Asset Management.
Once again, Greece let the market down, with no concrete announcement coming from its government officials before the weekend. “The big fireworks came on Sunday evening as a deal was struck with officials accepting the additional austerity measures that need to be implemented, thus paving the way for Greece to receive its much-needed bailout money,” says Stewart. This money is needed to pay creditors in the region of €14,5 billion to avoid a disorderly default.
In Stewart’s opinion it must have been a very painful and difficult decision for the ministers, as the general public voiced its discontent: more than 100 000 protesters rallied late on Sunday in protest against these measures.
As unemployment skyrockets in the debt-ridden country, one of the measures agreed upon in the labour reform department was that one civil servant would be hired for every five retiring in order to cut the workforce by 150 000 by 2015. The minimum wage of €750 per month would be reduced by 22%. For people below the age of 25, this figure would be reduced by 32%.
“With an unemployment rate that already started skyrocketing in 2009, such a vehement reaction from the Greek public was to be expected,” says Stewart.
Other notable measures to be implemented include government spending cuts: €1,1 billion in health spending, €400 million from public investment, €300 million from the defence budget, €300 million from pensions and €300 million from the central government.
As far as fiscal economic targets are concerned, the primary deficit should not exceed €2,06 billion for 2012. For 2013 and 2014, the primary surplus should be at least €3,6 billion and €9,5 billion respectively. From 2012 to 2014, the budget deficit must be reduced by seven percentage points of GDP.
“Of course the Greek equity market felt the full brunt of the economic impact of overextending the country, although it was up by more than 4% on Monday after the announcement,” says Stewart. “There is still a huge gap to fill, however, as the market has to make up for the drop of more than 85% from the 2007 peak.”
Although markets generally welcomed Sunday’s news that the Greeks had agreed on a solution to their problems, the test might only come on 20 February 2012 when another meeting of the EU/IMF is held to review the additional austerity measures. “Originally scheduled for 15 February, this meeting has already been postponed once. But they will have to come to some decision soon as Greece’s next payment is due in mid-March,” says Stewart. “Hopefully these measures will meet the requirements of the EU/IMF.”
“Hereafter the problems won’t get any smaller either,” he adds. “Focus will then be shifting to Italy. More serious stress might be experienced there, as the size of the damage left on banks’ balance sheets in the worst-case scenario is somewhere between €1,5 to €2 trillion, and will prove substantially more difficult to handle.
“Rome must refinance €54,5 billion in maturing debt over the next 30 days and it also has the highest debt-to-GDP ratio in the euro area after Greece.”
These events over the next few weeks make for a very volatile period in the global equity markets, says Stewart. His advice to investors is to continue to focus on long-term objectives rather than the shorter-term volatility as the European crisis plays itself out.
Source: Cadiz Street Communications
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