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Greece and how to negotiate

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I’m writing this whilst we are all awaiting the next proposal to be put forward by Greece to the Finance Ministers of the EU following the No Vote. Many are saying that the size of the No Vote was because of how the Greek Government presented the choice not as an in or out of the Euro but a yes or no for increased austerity. We now have to see if it really is about Grexit.

We in the UK are maybe not quite as interested as we should be, but from a banking point of view and from a creditor’s point of view we do seem to have a position by the Greek Government that is “we are not going to tell you how we are going to try to balance our books, but because we are in such dire straits you must write off some of our debt and fund us.” OK maybe a bit simplistic, but certainly that is how it is coming across. In the Euro crisis we essentially had four countries in financial difficulty – Greece, Spain, Portugal and Ireland. The last three have all made major changes to their welfare and taxes and have managed to turn a corner so they are now looking more secure. Greece was by far the worst case, but is also the country which appears to have tried the least to get its house in order, so hence the reluctance in some countries to support them anymore; even though the cost of a Grexit may be more than the cost of keeping Greece in the Euro and that might be what Greece are depending upon.

There have been many excellent quotes during the day so far but my favourite is that of Michael Hewson, chief market analyst at CMC Markets “None of these statements are particularly encouraging – can we skip ahead to the bit where the talks break up with no agreement”. Right he isn’t drawn on the question of whether we have Grexit or not? But he probably has a point about EU politics. No-one will want to actually make a definite decision so indecision may be the order of the day and then pure economic reality will lead to Grexit.

But we in the UK are to some degree bystanders and can only consider what impact this affair will have on the UK. We have already seen a drop in the value of the Euro and in reality this drop will probably be maintained regardless of the outcome of talks. If Greece is rescued then there will be consequences for the Euro and if there is Grexit there will be consequences as well. So we will have a trading partner with a weaker currency – this means that their imports will cost them more but their exports will be cheaper. In March the UK was a net importer from the Eurozone and in particular from Germany, Holland and France. But we import more from USA and China than we do from France or Holland and we export more to the USA and China than we do to those three European countries combined.

If we assumed, that the goods flowing between the countries in Europe is less price driven than need driven then this will work in our favour, except what about Germany? Germany and to a lesser degree France are heavily exposed to the Greek debt and it is hard to imagine what impact this might have on their banking systems and this could create an opportunity for British bankers. It might also mean that money for capital investment in Germany becomes more difficult and as a nation focused on manufacturing that could be a problem.

Yes it is true that any financial deal with Greece is going to have to include a so called ‘haircut’ of its debts, but equally if a deal is done it will have to include very real fiscal control and realism in Greece – if not then the Euro will be damaged. Some will argue that Grexit is inevitable if not now, then at least sometime in the future, so why not take the hit now.

My view is without some serious fiscal austerity further than Greece has already gone and coupled with some debt restructuring Greece should not remain within the Euro. I feel sorry for Greece, in that it is not the problem caused by current governments, but those of decades before and the failure to address those issues and the cultural attitude towards payment of taxes and receipt of benefits. In the rush to get countries signed up for the Euro, too many figures were taken without foundation and now Greece, which probably was not in a suitable condition to join when it did, is the casualty.

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