German Finance Minister Wolfgang Schäuble has finally acknowledged what his country’s politicians were reluctant to say ahead of this month’s federal election: Greece needs a third bailout. “There will have to be another program in Greece,” Schäuble told a rally for his Christian Democratic party in August. His boss, Angela Merkel, seeking to win a third term as chancellor, later admitted that fresh intervention is “possible.”
The key issue is Greece’s crippling debt burden — 160.5 percent of GDP, according to the latest official figures. Analysts say the necessary relief will probably come next year, through debt forgiveness on the bilateral loans extended by euro zone members. In Institutional Investor’s latest country credit survey, raters estimate that the likelihood of a Greek default has fallen over a two-year horizon but remains very high in the next five.
Will investors panic as they did before the first and second bailouts in 2010 and 2012, when markets fell on every new doubt that member states would help, or that the Greek people would accept the attached conditions? Stephen Macklow-Smith, senior European equities portfolio manager at J.P. Morgan Asset Management in London, expects calm because investors have “a much stronger sense than before of the collective European commitment to the integrity of the euro.” Even Greece has toed the line by privatizing state companies and closing national broadcaster ERT.
After the election, German lawmakers still may bow to public pressure by seeking to inflict more pain on Greece as payment for a third bailout, warns Georgios Tsapouris, a London-based investment strategist at private bank Coutts. One possibility is a haircut on bank deposits similar to the one imposed in Cyprus in April, which could provoke capital flight from the euro zone periphery, he says.
Tsapouris believes this outcome is unlikely, though. The European Central Bank would fight a haircut, and even politicians are growing wiser, he contends. “When the euro zone crisis started, politicians wouldn’t have considered the markets,” he says. “Now they think more about the impact of their actions.”
