Indraneel Karlekar, PhD, Managing Director Global Research & Strategy at Principal Global Investors says its “back to business as usual” with Greek debt.
After a period of relative calm, its back to business as usual in Greece, with growing concern that bailout terms will need to be renegotiated again. The trigger was a recent report by Moody’s that suggested Greece will have trouble making its next round of payments, amidst mounting tensions in Athens between the left-wing government and the International Monetary Fund (IMF). In a year where political risks in Europe are already elevated (elections in France and Germany), the Greek debt saga is a reminder that there are plenty of dangers lurking in capital markets that can unhinge the current risk-on mood.
Elections or payment?
The question that faces creditors is whether Greece will make their debt payments or renegotiate them. Greece will have to service a €1.4 billion payment to the European Central Bank in February, and then write a €7 billion check to creditors in July. Alternatively, the Greek government could choose early elections in order to negotiate a better position for itself. Moody’s has suggested that Greece will be “highly challenged” to make these payments, but the ratings agency feels that some sort of compromise can be worked out that resembles the 2015 resolution.
Only sustainable and consistent growth will be able to provide a long-lasting solution to the debt crisis, not only in Greece, but in other indebted European countries (such as Italy). Given that growth has been elusive for Greece, even as it has struggled to reform its economy, structural changes probably need to be implemented over time. However, a successful short-term solution to Greek debt is also essential. In the current period of rising nationalism, an amicable resolution to the current payment would be a welcome relief to the global economy.
