Pioneer, Skandia and Newton seem to agree that some sort of restructuring is on the way for Greece, but disagree over precisely what is the best way to extract a positive outcome from an extremely fluid situation politically and economically.
Pioneer, Skandia and Newton seem to agree that some sort of restructuring is on the way for Greece, but disagree over precisely what is the best way to extract a positive outcome from an extremely fluid situation politically and economically.
Skandia takes the line that Greece needs to default, but not immediately.
Rupert Watson, head of asset allocation at Skandia Investment Group,said: "The scale of the challenge facing Greece is enormous. Given the scale of the challenge it is likely to need to reduce the amount of the debt it owes at some point. However, if this is attempted this year, the cost to the Greek and European economy and markets could be huge. As a result it is better that Greece is given more time to improve its finances which should also allow a further improvement in the finances of both peripheral economies and European banks. In short we think that Greece needs to default, but not yet."
Pioneer Investments' European fixed income team also said that it felt a restructuring was “inevitable”. But it added that any rash action came with danger particularly in respect of the impact on banks in other eurozone countries.
“The biggest issue for the financial sector near-term is clearly the peripheral issue. Should there be a hard restructuring of Greek sovereign debt, meaning principal write-down and/or lower coupons, banks owning those bonds will be unable to avoid crystallising losses.”
“A ‘reprofiling’ (say via a maturity extension – a soft restructuring) would likely be somewhat less expensive for the sector given that an element of the bonds held by the banking sector (i.e. those in Hold to Maturity or Loan & Receivables books) should be able to avoid immediate impairments.”
However, Paul Brain, manager of the Newton Investment Management Newton Global Dynamic Bond fund, puts forward an argument for more rapid action, suggesting that delay comes with more political risk.
“The ongoing concern about the peripheral European economies doesn’t seem to be diminishing, while the longer term issue of approaching the problem through fiscal austerity takes many years, and requires ample liquidity and funding,” he said.
“Meanwhile, the perception of the different taxpayers across Europe is that they are being asked to pay for either European bank restructuring - in the case of Ireland and Greece - or other country’s debt - as far as the electorate of Germany, Finland and the Netherlands is concerned. Time is the great healer of debt problems, but not if the electorate give up.”
“There is the chance that these fragile European democracies could undergo a change of government to one that doesn’t have the same commitment as its predecessors. This is the situation we could be faced with in Greece as we move through the summer. In our view, it remains a ‘tail risk’, and therefore not our main scenario, but it is a risk that will grow the longer we wait for a proper solution.”
Whatever the outcome, the risk to banks and other financial institutions is still pressing.
Brain believes the broader agreement between France and Germany to involve private sector investors in an overall solution is likely to be rolled out to smaller eurozone economies in turn.
“This could effectively force the banks to voluntarily roll-over maturing Greek debt into 7+ year maturities with below market coupons and has the benefit of sharing the pain, while it would also lengthen the maturity profile for Greece, thereby giving it longer for its austerity measures to take effect,” he said.
