Greece – An update from the Euro Sovereign and Aggregate bond team

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Here is our analysis of the situation regarding Greece following the meeting of the finance ministers of the eurozone (the Eurogroup) in Brussels on 11 February. As was widely expected, the Eurogroup failed to reach common ground over Greece, although some progress was made.

There are two main points we’d make ahead of the next meeting (on 16 February):

– In our view, the worse the outcome for Greece the better it will be for eurozone bonds.

– We expect the new Greek government to negotiate a short-term agreement, buying time and laying out a transition period for renegotiation of the programme with the Troika.

 1. A Greek crisis leading to Grexit would be very tough on the Greek people as no contingency plan for such an outcome has been prepared by the new Greek government: Membership of the eurozone has a lot of advantages for Greece (there’s a strong consensus on this among the Greek population). So a breaking of the current agreement would trigger a new crisis which, in all probability, would have a significantly adverse impact on those who voted for Tsipras.

This would demonstrate to others countries that there is no simple alternative today to austerity. Political contagion would therefore be avoided.

2. The Greek government would like to renegotiate the fiscal austerity for social goals.

There are two issues:

– It is not possible, before its termination, to accommodate requests to change an agreement such as a “memorandum of understanding”, between eurozone governments because otherwise the EU’s decisions would no longer be credible. Validation of such changes would be difficult as it would require parliamentary approval in Germany and Finland.

– Some German politicians would probably prefer Greece to exit the eurozone. So an immediate confrontation doesn’t make sense for Greece. Of course the situation in Europe has changed since 2011 when the previous negotiation took place. The eurozone started to recover in the fourth quarter of 2014 and EU members don’t want to lose growth momentum. So they agree with the objective of finding a solution, explaining the choice of Tsipras to begin discussions with these two entities. Greece’s objective is to obtain a transition period to elaborate their new plan with the European commission. A better economic picture and the support of the ECB’s quantitative easing should facilitate a new agreement.

Patrick Barbe

CIO Core Fixed Income, Sovereign & Aggregate management team, Portfolio Manager

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