What Next For Greece?

Greece had been a dominant issue for investors for much of the first seven months of the year.  The seemingly reversal by Greek Prime Minister Tsipras allowed for Greece to move off  the front burner.  China stepped up to replace Greece as a key issue for investors.    First it was the slide in the Chinese share prices, and as stocks appeared to stabilize, officials altered the currency regime. 

With the German parliament's approval for a third aid package for Greece, and the Dutch approval likely, the Greek saga enters a new phase.   Greek politics, bank recapitalization and implementation will be the new focus. 

The demands of the official creditors has split the loose coalition that makes up the Syriza party.  There is much discussion about whether Tsipras will call a vote of confidence.  If he does, the left-wing of Syriza may come back into the fold, while the pro-European parties, like PASOK and the New Democracy would likely vote to against the government,  which it had supported on the reforms.  The left-wing of Syriza may chose instead to make its stand at the party conference next month.   

A key tactical decision is if new elections are to be held, when would be the least disruptive.  The first review of the implementation of Greece's commitments is expected in October.  That is a key not only for freeing up more funds, but for a more serious discussion about debt relief.  Debt relief is not just what Syriza has campaigned for, but it is a precondition for IMF involvement.  An election after the review would seem to be the lest disruptive and the better for Tsipras, who is still the most popular politician in Greece.   The polls suggest Syriza would likely return to power, but probably in a somewhat broader coalition.  

The ECB will conduct a stress test and review the asset quality of Greece's large banks.  This will help determine the amount of recapitalization  funds needed.   The continued contraction in nominal GDP in Greece warns that the loan book of the banks has likely deteriorated.  Importantly, official creditors have ruled out forcing depositors to bear any of the cost of the recapitalization.  Senior bondholders are a different story.  The precise details of the recapitalization have not been decided, and it could involve some consolidation among the four large banks.  

Skeptics about the Greek program falls into two camps.  The first sees the austerity being imposed as being fundamentally antithetical to growing.  The second sees the key problem being that Tspiras is not seriously commitment to implementation.  The first camp may ultimately be proven right, but their argument is moot presently.   Greece's elected representatives have accepted the terms.  It is the second issue that is key.  

Lastly, we note that Merkel suggested this week that the refugee problem is likely to become more important (and divisive?) than the Greek economic and financial problems that nearly tore EMU apart.   More refugees entered Greece last month than in the whole of last year.  Nearly 95% come from Syria, Afghanistan and Iraq.   Without addressing this humanitarian issue, it is difficult to see how Greece's is going to find its economic bearings.  

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