Hopefully this is the last time for a long time we talk about Greece. With a 3 year bailout deal pending, 2018 should be the next Greek commentary…
Clearly there is a battle here between existing debt concerns and growth concerns. Many people look at the situation and see Greece as being overly indulgent and unwilling to make sacrifices in order to get their spending in check. This scenario has been unfolding over the last four years and perspective is essential. The main issues to tackle are Greek debt to GDP and escape velocity, as well as the impact of austerity on an already floundering economy.
Greece – Debt to GDP
The current debt to GDP ratio is 175.1%[1]. What does that mean? This statistic reflects the amount of national debt compared to the amount its economy produces. It is very telling of a countries ability to weather a recession, return to growth, and pay off its debt. This last factor is often referred to as escape velocity. The escape velocity for Greece no longer exists! This is causing wide spread calls for mass reduction in annual spending by the Greek government. So logically speaking, you reduce you expenses to a level you can “afford” in order to ensure your economy does not fail.
Greece – Growth
So is Greece fighting these reforms because they have no desire to cut spending? Maybe, but economically they are not without merit in their fight. During times of recession central banks and governments will take actions and pass laws that ease financial obligations for consumers (lowering rates and taxes) in order to stimulate the economy. During expansions, central banks and governments will tighten monetary policy and laws in order to keep the economy from overheating.
In essence, with the Greek economy struggling to stay afloat they are being asked to tighten tax laws and further constrain the Greek consumer. This flies in the face of enabling growth. Does this mean that Greece should be allowed to freely spend? No. It does however add credence to the most recent proposal offered by Greece. It contains many of the same reforms as the previous proposal by the EU, but with a longer time table. This would allow the reforms to take hold without strangling the Greek economy.
Domestic
The markets were little changed after heavy volatility throughout the week. International issues caused higher volumes and volatility while late week resolutions caused a rally in the US. Interest rates in the 10 year treasury rose at the end of the week signaling a more risk on environment. The depth of the current down swing has only reached approximately 5%. Perhaps the duration of this down turn has made it feel deeper. Many feel this represents a correction in and of itself.
The JOLTS job report reflected the most openings in its history, 12/2000, with 5.36M[2]. Also, PMI data remained strong. Attention should now be diverted from Greece to 2nd quarter earnings which started this past week.
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[2] www.mfs.com – week in review