Written by Matt Sherwood

Head of Investment Strategy, Multi Assets

The two key problems for Greece in the past five years has been its debt and the fact that the economy has remained depressed, which has culminated in its government debt to GDP ratio rising to 180% of GDP, despite three quarters of its private sector credit being written off in 2012. At that time, it was estimated, calculated or politically spun that debt would decline to 120% of GDP by 2020, an estimate I completely disagreed with at the time. However in the 2015 Greek tragedy, the Europeans want fiscal consolidation totaling -9% of GDP in the next three years funded by pension reforms, and instead got increases in taxes on businesses and middle- and upper-income workers.The two key problems for Greece in the past five years has been its debt and the fact that the economy has remained depressed, which has culminated in its government debt to GDP ratio rising to 180% of GDP, despite three quarters of its private sector credit being written off in 2012.

At that time, it was estimated, calculated or politically spun that debt would decline to 120% of GDP by 2020, an estimate I completely disagreed with at the time. However in the 2015 Greek tragedy, the Europeans want fiscal consolidation totaling -9% of GDP in the next three years funded by pension reforms, and instead got increases in taxes on businesses and middle- and upper-income workers.

This is worrying as I cannot name one country in history who taxed its way to the promised land, the rich and business are always five miles ahead of the regulator in reducing their tax burden and such a move could further sap growth through economic multiplier effects in an economy which is still recessed. Therefore the policy option of raising taxes may be more tolerable to the Greek electorate, but it place more hurdles in front of an already crippled Greek economy and won’t be as effective as cutting spending, which will raise the debt burden even more.

I don’t yet think the deal is done with creditors, I don’t believe it will get through the Greek Parliament unscathed and I certainty do not think that any deal will result in the end of Greece’s reliance on its creditors, whose financial aid will be needed for another five years, at least. In the end, I maintain my view that Greece will have to default on part or all of its debt and the key for markets is whether this is orderly or unilateral. Let’s hope it’s the former.