Capital Econ: The Greek Crisis Starts To Restrain Euro Recovery

The Capital Economics, US Economics Weekly Bulletin focused on the spillover effects of the Greek crisis this week, (27th April 2015).

Greek crisis

The Greek crisis continues to drag on with Friday’s meeting of euro-zone finance ministers not yielding any major breakthroughs in the negotiations over the remaining tranche of Greece’s second bailout.

Nonetheless, there were some positive developments last week:

Firstly, officials appeared to conclude that setting Greece successive deadlines was counter-productive. These deadlines have been adding pressure to the situation, and there is now scope for the Greek government to buy more time.

Secondly, Greece is no longer at risk of going bankrupt this month. The government’s raid on state entities has, for the time being, eased worries of an imminent bankruptcy. Greece now supposedly has enough cash to get through to the end of June.

Third, it appears that Greek Finance Minister Yanis Varoufakis has started to reconsider the Government’s previous resistance to some of the demands made by its creditors. Varoufakis argued that the disagreements between Greece and its creditors were not “unbridgeable”. Varoufakis also talked of rationalizing the pension system, establishing a fully independent tax commission and seeking more proceeds from privatizations.

Fourth, there was some talk of Greek government bonds currently held by the ECB, and due to be redeemed in the summer, would be transferred to the European Stability Mechanism (ESM) and have their maturities extended. This process would help preserve emergency liquidity.

Finally, it emerged that even if the Greek Government engaged in a more substantial form of debt restructuring, the ECB would not be forced to withdraw its support for emergency liquidity for Greek banks, as had been widely assumed. Essentially, this gives Greece the green light to default and stay within the Eurozone.

Still:

But while the additional breathing space provided by the extra cash is clearly welcome, it would be optimistic to conclude from any of this that the fundamental situation has really changed.

Spill over

Signs started to emerge last week that this Greek crisis was starting to affect other European nations, holding back the region’s economic recovery. Several indicators such as the PMIs, the EC’s gauge of consumer confidence and the expectations indices of the German ZEW and Ifo surveys all slipped back in April. Although, as Capital Economics notes, declines primarily reflected slight deterioration in sentiment and expectations, rather than in actual economic conditions. For example, the current conditions indices of the Ifo and ZEW surveys rose further, to four-year highs.

Capital Econ: The Greek Crisis Starts To Restrain Euro Recovery

PMI output index pushed to 53.5 in April, higher than the average reading seen in the first quarter. With this being the case, it’s possible that Eurozone economic growth could pick up a bit during the second quarter.

Still, in the absence of other obvious negative influences, it seems safe to assume that the softer tone of the surveys reflects the Greek situation and could therefore continue if a comprehensive resolution to the latter remains elusive.

Overall, then, we have not altered our views that the risk of a Greek exit from the euro-zone…presents a significant downside risk to the euro-zone economy.

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