Liquid Greece still not solvent

After months of will-they-or-won’t-they, the Greek government finally reached a deal on spending cuts, potentially opening the ECB vault that holds a €130 billion ($172 billion) bailout package that Greece needs to stave off a default.

The deal doesn’t impress the Canadian financial industry much and the market’s southward movement bears out the claim.

In the short-term they have averted an economic Armageddon, says Paul Taylor, chief investment officer, BMO Harris Private Banking in Toronto. But in the long term, they’ve simply kicked the can down the road.

“This is still not the penultimate situation and agreement for Greece; there is still a lot of heavy lifting to do as we go forward,” says Taylor. “But, in the short-term it looks like they have at least met the reasonable demands of the Greek electorate, the folks who hold Greek debts and the troika [of foreign lenders comprising the European Commission, the European Central Bank and the International Monetary Fund].”

However, the desired outcome of the deal, the €130 billion emergency fund, will only make Greece liquid, not solvent. Taylor says it’s treating the symptoms not the disease.

“This doesn’t address the structural issue; the total amount of debt as a result of this agreement is going to be unsustainably high,” he said. “There isn’t anything in this that would stimulate their growth sufficient to offset the massive amount of debt that will still remain on their balance sheet.”

The only thing it ends up doing, therefore, is delaying the inevitable hard decisions.

While it will take considerably more for Canadian investors to re-embrace European investments, Taylor is hoping “a virtuous cycle will unwind, where stability in euro land with a little bit of better economic data south of the border can snowball in a positive way.

“Market valuations currently do not assume a high probability of an outright default of a systemically important European country.”

Analysts have long held the view that Greece would eventually come around to the terms for the bailout agreement and that investors will have had enough time to reduce their exposure to ailing economies in Europe.

Greek Prime Minister Lucas D. Papademos and other members of the coalition government had agreed on a range of spending cuts—wage cuts and reduced public spending, but balked at the unpopular idea of pension cuts. Greece finally met its financial backers’ demand by trimming defence spending and other expenditures.