Goodbye Greece, thanks for the memories
Greece IS going, it's just a matter of time, says Arnaud Leclercq, Partner at Lombard Odier Capital Partners and Head of the New Markets.
"A Greek exit from the Euro zone? It is not a matter of if, but rather when and how. The endgame to the debt crisis has not changed; only massive debt restructuring can put a term to the vicious spiral. Policymakers have unfortunately not yet embraced that conclusion and are continuing to buy time.
"In this context, the recent European Union summit delivered a number of welcome measures, addressing the main pressures points in the Euro zone periphery: negative spiral between overleveraged public and banking sector; fiscal instability and ongoing deposit leakage and bank balance sheet deterioration.
"While necessary, these measures are not sufficient in our view. Their shortcomings are lack of both detail and firepower. In particular, no details were provided on the future banking supervision system. On the fiscal issue, no additional firepower was provided. While welcome, the "growth pact" only represents 1.2 per cent of Euro zone GDP. Given the low local fiscal multiplier, it is unlikely to provide more than a one-time 0.8-1 per cent boost to economic growth in the periphery. Finally, no mention was made of a European Union-wide deposit guarantee scheme, which would be the most effective measure to counter deposit leakage.
"While positive, the decisions taken during the last European Union summit are not a bazooka. And for Greece, there is really no option left but to default totally on its debt and exit the Euro zone. It is currently having to spend one fifth of its government cash receipts to service debt at rates that are subsidised. A massive currency devaluation would also help restore some competitiveness, without overly damaging inflationary consequences short-term.'
Article publish in Wealth Arabia, August-September 2012.