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Time is the great healer of debt problems, but not if the electorate give up
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The Greek government needs to agree upon a series of austerity measures before it receives another bail-out
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Private sector involvement seems likely in any new batch of funds
Paul Brain, manager of the Newton Global Dynamic Bond Fund, reacts to the latest news emerging from the Eurozone as concerns intensify over Greek sovereign debt.
The past few weeks have been dominated by high profile political wrangling over the prospect of another Greek bail-out, following on from its first in May 2010, although any bail-out would require concrete Greek austerity plans to be put in place first. Brain explains, "Indeed, the ongoing concern about the peripheral European economies doesn't seem to be diminishing, while the longer term issue of approaching the problem through fiscal austerity takes many years, and requires ample liquidity and funding.
"Meanwhile, the perception of the different taxpayers across Europe is that they are being asked to pay for either European bank restructuring - in the case of Ireland and Greece - or other country's debt - as far as the electorate of Germany, Finland and the Netherlands is concerned. Time is the great healer of debt problems, but not if the electorate give up." He continues, "There is the chance that these fragile European democracies could undergo a change of government to one that doesn't have the same commitment as its predecessors.
This is the situation we could be faced with in Greece as we move through the summer. In our view, it remains a 'tail risk', and therefore not our main scenario, but it is a risk that will grow the longer we wait for a proper solution," Brain adds.
"The latest developments left the markets awaiting a vote of confidence on the Greek government, which it won marginally last night, and it is now up to parliament to agree upon the latest batch of fiscal austerity measures," he adds. "Only then is the collective European leadership likely to release the next round of cash. This has to occur before the large bond redemption on the 20th August. After that, Greece will require a new batch of financing to see it through to 2014."
Private sector involvement?
"In order to get another batch of funds through the Northern European parliaments, we believe that there will have to be some form of private sector involvement (PSI)," he explains. "This could effectively force the banks to voluntarily roll-over maturing Greek debt into 7+ year maturities with below market coupons and has the benefit of sharing the pain, while it would also lengthen the maturity profile for Greece, thereby giving it longer for its austerity measures to take effect.
"Late last week, there was a broad agreement on PSI between the French and the German leaders, removing one concern for the markets. The PSI idea could be rolled out to the other smaller peripheral economies (Ireland and Portugal) in slightly different forms, and it might be sufficient for these economies. For Greece, however," Brain concludes, "we continue to believe that a more significant restructuring of the debt will be necessary, and we expect the euro to be held back by these ongoing uncertainties and delays."
Newton Investment Management is one of BNY Mellon Asset Management specialist asset managers.
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