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Greece will be back

I wrote last week (The euro is the loser from Greece) that there would be no winners from the situation regarding Greece and the price action we’ve seen so far largely bears that out. The initial relief rally on the single currency was soon met with selling pressure as the details came through and German Chancellor Merkel took a tough line in her post-meeting press conference.

Greece has been ‘saved’ by a deal, which requires reform measures to be passed mid-week by the Greek parliament (Finland and Germany must also pass in their parliaments). And never forget, a deal that is reached after months of negotiations with literally hours to spare before a Grexit cannot be a good deal. On the face of it, Greece is the one that has blinked, because the deal does not give any guarantees with regards to the restructuring of Greek debt. The statement says that “nominal haircuts on the debt cannot be undertaken” and that they remain ready to consider “possible additional measures aiming at ensuring that gross financing needs remain at a sustainable level”. It’s unthinkable that this deal would have been reached with Varoufakis still as Finance Minister, given the concessions made and lack of debt restructuring.

As for the Eurogroup and the institution of the single currency, it’s simple. Greece has been kept in a monetary union to which it should not have been admitted and via means that make little economic sense. Even at the time of the initial re-structuring of Greek debt back in 2012 (private sector involvement or PSI), it was fanciful to expect Greece to achieve the target of a debt/GDP ratio of 120% by 2020. The IMF has more recently distanced itself from the whole process and not surprisingly so. No sovereign crisis in history has been solved by lending to a nation state, whose debt has not first been put onto a sustainable footing via a combination of default and often currency devaluation as well.

So without mentioning cans and roads, today’s deal does kick the underlying issues further into the future and at some point, they will have to be addressed. The primary one is the sustainability of Greek debt. The wider one is that of operating a single currency with no real degree of fiscal coordination, some which makes economic sense but remains political suicide for heads of state.

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