Takeaways: A deal at last for Greece! After marathon talks which lasted over 17 hours, an agreement was announced on Sunday night to keep the Greeks in the Euro. ‘Deal’ in this case being an agreement to enter talks on a new bailout linked to a range of new pre-conditions. This effectively leaves Greece borrowing another €86bn on a debt to GDP that’s already around 175% without an explicit promise of debt restructuring.
But after 6-years of kicking the can down the road are we finally closing in on a deal that will actually work? Markets seemed unconvinced, with the Euro down against major currencies. Meanwhile, many economists – most notably those from the IMF – continue to state that a Greek deal won’t be sustainable for Greece without some form of significant debt forgiveness.
The IMF report, which came to light on Wednesday, states that Greece’s public debt is now “highly unsustainable”. It urged debt relief on a scale well beyond what has been under consideration to date. According to the IMF, Greece needs a full moratorium on all debt payments for 30 years, a dramatic extension on the maturity of its debts and perhaps even explicit annual transfers to the Greek budget in order to drag the country out of depression. Without these measures, an upfront formal “debt haircut” will be required, with the IMF now predicting that Greece’s debt to GDP will climb to 200% over the next 2-years – compared to an earlier prediction only two weeks ago of 177%– such has been the damage caused by the capital control imposed in the country.
This leaves the IMF effectively saying “thanks but no thanks” after the Eurozone forced the Greeks to accept IMF involvement in any new bailout against their explicit protests. It will not participate in any new bailout unless Germany and the rest of the Eurozone agree to sweeping debt relief – a position that greatly complicates the recue deal agreed by Eurozone leaders. The concept does appear to be on the table, according Mario Draghi, who said it was a matter of ‘how’ not ‘whether’. However, this seems contrary to comments from Germany, Finland, Slovakia….. Economics have long become secondary to politics in this long running saga.
The Greek parliament passed raft of tough reforms demanded by its Eurozone creditors on Wednesday night. But, getting Greek MPs and citizens to agree to continue with austerity and reforms, which even the IMF does not believe will put the country back on the path to prosperity, will be extremely difficult. Arguably, the whole European project has been dealt a terrible blow by the way events are playing out. It would seem that the key lesson to be learnt from the Eurozone crisis, that it’s better to tackle problems head on instead of delaying, imposing austerity and hoping for the best, is still to be learnt.
As for the wider impact, there is certainly a danger to the return of boardroom confidence that has been the main driver for M&A in 2014-5. But perhaps the greatest impact may be on the UK EU Referendum. Concerns about sovereignty and the dominance of the Eurozone within the EU won’t be allayed by this crisis and arguably it’s playing right into the hands of those who want to see the UK leave the EU. The threat of a “Brexit” is probably the greatest it’s ever been.
Budget 2015 – The Chancellor pulls a few rabbits out of his hat
Turning away from the turmoil in Europe, the UK’s Chancellor unveiled one of the most radical budgets in recent memory last week and the first Conservative one since 1992. Deficit reduction continues to take centre stage. But, as was flagged before the announcement, spending is to be cut at a slower rate than promised in either the March Budget or the Conservative Party Manifesto.
The budget contained a number of surprises from a business perspective, including the Chancellor’s announcement of the introduction of a national living wage of £7.20 in 2016, rising to £9 by 2020, which the OBR estimates will cost employers around £4bn. To help combat this increased cost, corporation tax is to come down to 18% by 2020, at a cost to the Treasury of £6.5bn. The Annual Investment Allowance is set permanently at £200k; significantly above the £25k expected, but still £300k less than it’s current level. This certainty will now allow companies to plan; but will be of little benefit to those contemplating large infrastructure projects.
The Asset Management industry took a noticeable hit in the budget with partners in private equity and alternative investment funds now having to pay full capital gains tax on carried interest as part a series of measures to tackle tax avoidance. As explained by Russell Morgan, partner at EY “In general, it’s the key economics for a private equity manager, not their base pay. It’s all about the carry, which builds up over a number of years”. While it’s still too early to determine what impact on this industry will be, it’s reasonable to assume that some funds or fund managers may decide to relocate to other jurisdictions.
Overall, business will make a net contribution of £0.5bn billion to the Chancellor’s budget. The total giveaways for companies is £10bn, which is £0.5bn less than the tax rises from the acceleration of tax payments, changes to the Bank Levy and restrictions for relief on Goodwill. Further in-depth analysis can be found on ey.com and Chief Economist for UK&I at EY, Mark Gregory’s blog.
Rate rises on the way on each side of the pond
It seems that the unprecedented era of easy money seen on both sides of the Atlantic for the last 7-years could be over soon; with the Fed announcing that it’s likely to hike rates before the end of the year. Despite continued turbulence in the Eurozone and China and the IMF’s warning to keep rates at their current levels into 2016, it is now expected that US interest rates will rise before the year is out – the first increase since 2006.
The BoE Governor Mark Carney also stated during the week that officials are edging closer to tightening monetary policy as the economic recovery continues, resulting in the pound surging against the dollar. The governor’s comments appeared to catch the market off-guard. The comments came shortly after data showed Britain’s inflation rate fell back to zero in June, led by prices for food and clothing. However, the Bank’s monetary policy committee is nevertheless focused on the outlook for the labour market, with pay packets in Britain finally getting fatter (wages were 3.2% higher in the three months to May compared with 2014) prompting some members to say an increase in interest rates will be needed soon. The expectation is that the path for interest-rate increases would be limited and gradual. Most analysts now have pencilled in February / March 2016, back from August as previously forecast.
With some business leaders claiming that looming rate rises around the world are of a bigger concern than the Greek crisis, we are in for turbulent times ahead.