Why the Eurozone May Avoid a Greek Crisis This Summer

Whisper it, but this summer might not be marked by a flare-up of the Greek crisis. The move to set out a path to debt relief for Greece at Monday’s meeting of eurozone finance ministers is a clear step forward, even if no firm decisions were taken.

   That marks a rare occasion when a Eurogroup meeting on Greece has exceeded expectations. Greek bond yields fell sharply Tuesday in recognition of that, with 10-year yields reaching their lowest point this year. But the chronic problem linked to Greece’s debt isn’t going away.

   True, the political consensus forged Monday could yet be dented. There remain concerns over Greece’s ability to implement legislation it has passed. Other eurozone governments who have lent money to Greece could yet backtrack. The first review of Greece’s latest bailout program is already well overdue, having originally been scheduled for completion at the end of last year. Greece’s bond curve is still flat to inverted, suggesting continued skepticism from investors.

   Even if Greece were to hit the headlines again, it may only be a sideshow. Global concerns are to the fore: China and the U.S. are the big-picture concerns for investors, while in Europe the U.K.’s vote on membership of the European Union has the potential to be far more disruptive. Greek bonds have essentially become detached from the rest of the eurozone government bond market; the financial linkages that could have caused contagion are broken.

   Still, there is progress: Even talking about options for Greece’s debt -which stood at 177% of gross domestic product at end-2015- has been difficult until now. On Monday, Eurogroup chief Jeroen Dijsselbloem publicly acknowledged that it was a problem that needed addressing. Ministers drew up a set of principles for agreeing debt relief, although measures such as extending maturities and providing grace periods might only come in 2018. Haircuts, which would constitute overt fiscal transfers to Greece, remain taboo. Politically, however, the discussion of debt relief may allow the continued involvement in the process of the International Monetary Fund, which has been advocating simultaneous talks on debt and reforms.

   Work will now be carried out to flesh out the options for Greece’s debt. The next Eurogroup meeting on May 24 will probably be tougher, but a route to approving further disbursements of cash to Greece is open. That should remove the risk of a rerun of 2015’s last-minute scramble to avoid a damaging default on bonds held by the European Central Bank.

   The pressure is on to avoid an embarrassing eurozone meltdown as the U.K. enters the final weeks of its debate on its future within Europe. The Greek crisis isn’t going away, especially as it isn’t clear that the measures the government are taking, relying too much on higher taxes, will generate sustainable growth. But the chance of a summer squall has diminished.

Πηγή: wsj.com