While Greece has been pushed off the front page and has not affected our markets, the crisis has far from receded. Though they received the much-needed bailout this summer (click here to read our previous blog on Greece), the economy remains in a precarious state and will contract further next year. (For a recap of Greece’s predicament, please follow the link to our short video.)
Over the weekend, the Greek Parliament passed their 2016 budget. The plan calls for the government to extract 5.7 billion euros (about $6.2 billion) from the economy through 2.2 billion in tax increases and the remainder coming from spending cuts. To achieve this goal, they projected the economy would contract by only 0.7% in 2016, followed by growth in 2017 – both seem optimistic given the reduction in government spending and tax increases.
This budget is more severe than last year’s which called for savings of 1.5 billion euros and, although it satisfies international lenders, only time will tell if Greek citizens accept its austerity.
In order to ensure its passage, Prime Minister Alexis Tsipras stressed how the government would increase spending on hospitals and social welfare for the first time in five years. The vote closed with 153 members for the budget and 145 members against it. These numbers are similar to the November 20th parliamentary vote on a new set of economic reforms. Passage of these reforms was needed to receive 12 billion euros in bailout money – of which, 10 billion was slated to recapitalize Greek banks. Unfortunately for the Prime Minister, the vote cost him two coalition partners, reducing his majority in parliament to only three.
Earlier last week, a second general strike took place in Greece to protest the planned budget cuts and proposed pension reforms. The government finds itself in a grim balancing act trying to satisfy creditor demands for more austerity, ensuring the continuation of the bailouts but inevitably curtailing short-term growth and the Greek populace who has suffered because of the economic collapse. And things are going to get worse before they get better.
On November 17th, Greece came to an agreement with its creditors that allowed the next tranche of the bailout to be released. The creditors had delayed the disbursement to ensure Greece adhered to its prior commitments, but the agreement came with costs. The pact was reached only after Greece conceded to deal with its unpaid mortgages.
Approximately 1/3 of home mortgages are in or near default, but current rules prevent banks from foreclosing on these properties. The creditors forced Athens to reduce the scope of these regulations to protect only the most vulnerable 25% of households while extending potential protection to an additional 35%.
Evicting people from their homes when work is unavailable is a recipe for disaster. With the economy expected to contract further and unemployment to rise, Greece may become a hot bed for social unrest. After being re-elected in September, Tsiparis now holds a very slim majority in parliament and policies in place could change this quickly.
In the long run the situation is unsustainable. Next year, Greek debt is expected to rise to nearly 200% of gross domestic product. For Greece to prosper some sort of debt relief has to be granted.
Next week, I’ll update how the immigration mess in Europe is exacerbating this crisis. And to get our thoughts on the Greek crisis from the beginning, please read our position papers on the following links: Greece’s Debt Crisis from September 2011 and Greece’s Debt Crisis – Update from October 2011.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, PhD, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his BS from URI, MBA from Boston University and PhD from SMC University.