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IPE special report May 2018

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Industry experts give euro-zone deal cautious welcome

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  • Industry experts give euro-zone deal cautious welcome

EUROPE - The European Commission's new rescue package for Greece has come as a breath of fresh air for some industry experts, but many others have voiced serious concerns about the euro-zone's future.

Assets managers and pension consultants across Europe generally welcomed the deal, saying it was necessary for European leaders to recognise that Greece would be unable to cope with its massive debt.

Dan Morris, global strategist at JP Morgan Asset Management, qualified the package as positive.

"Equities, commodities and the euro have risen, while yields on safe haven government debt have fallen," he said.

"Key to this reaction has been the management of expectations by the euro-zone's leaders. They were aware of the need to stick to the goals already set out, while acknowledging that all the details would not be finalised for this summit."

According to the European Council, the package will reduce Greece's public debt to 120% of GDP by 2020.

In the forging of the deal, policymakers aimed to avoid "some of the errors of the recent past", said Herman Van Rompuy, president of the European Council.

"In taking these decisions," he added, "we lay the foundations for our future. All members of the Euro Summit are determined to follow this path."

Euro-zone member states will contribute €30bn to the 'private-sector involvement' (PSI) package, while a new EU-IMF, multi-annual programme - which will be put in place at the end of this year - will finance as much as €100bn.

The summit also agreed that the resources of the European Financial Stability Facility (EFSF) should be enlarged without extending the guarantees provided by member states.

Around €1trn could therefore be leveraged to create a "firewall" against contagion from the debt crisis.

In addition, private banks that hold notional Greek debt agreed to discount the amount of debt by 50%.

Ángel Martínez-Aldama, director of the Spanish investment and pension fund association INVERCO, told IPE: "An important step has been taken as European leaders have finally recognised Greece will not be able to pay the totality of its debt.

"The remaining question, however, is will the Greek government be able to pay the remaining 50% of the outstanding debt? What will happen in the coming months if the Greek economy does not record any growth?

"Clearly, if the economy does not take a boost, there will be a significant lack of income to help reduce the deficit." 

Darren Williams, European economist at AllianceBernstein, shared the same concerns, arguing that the new package was merely an extension of the 21 July agreement.

"It is more about taking Greece out of the market for the remainder of the decade than restoring debt sustainability," he said. "Taken at face value, these two developments should lessen the risk of a disorderly default, but there are many unanswered questions - including the details of the package, likely participation rates, what is being demanded of Greece and whether or not it can deliver."

According to Aberdeen Asset Management, solvency is, in fact, the core of the problem, and questions remain as to the longer-term solvency of some peripheral euro-zone countries.

Mike Turner, head of global strategy and asset allocation, said: "The dislocation in euro-zone money markets we have witnessed over the past three months may already have done grave damage to the growth prospects for the region next year, and we expect the release of economic data to be scrutinised heavily as we work through the first part of 2012."

Stuart Thomson, chief economist at Ignis Asset Management, was unequivocal in his assessment of the agreement as a "massive confidence trick."

"The euro-zone con trick highlights excessive debt within the region," he said. "This debt is stifling growth, which in turn means the affected countries cannot grow their way out of the current crisis, and this debt will eventually have to be written off.  

"This will take place through a series of sovereign haircuts. The next in line at the barbers is Portugal, but we expect it to be followed by Spain, Greece again, Italy, Ireland and Belgium over the next few years."

Pension experts will now turn their eyes to the next summit in early November, hoping that further measures will be implemented to stabilise the euro-zone.

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