Eurozone reforms needed after Greece crisis

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The agreement of a third bailout on Greece is likely to put the Greek crisis to rest, but it has highlighted glaring holes in the eurozone structure that must be reformed, say asset managers.

Angela Merkel, François Hollande and Alexis Tsipras agreed a deal with Greece that will release around €86bn of bailout money over three years, in return for stringent cuts. The country will have to make reforms to taxes and pensions, and will set aside €50bn of assets into a privatisation fund.

However, while news of a potential end to the Greek crisis has been welcomed by asset managers, they are calling for repairs to the cracks in the eurozone that have been exposed during this months-long saga.

“This weekend we saw deep divisions come to the fore between the eurozone’s two most important members, France and Germany,” says Stephanie Flanders, chief market strategist for Europe at JP Morgan Asset Management. “We also saw, once again, the challenges of responding to crises within a single currency area that does not have a single unified body for making decisions.”

There is only a 10 per cent chance of the eurozone continuing to exist successfully in its current form, says Christophe Donay, chief strategist at Pictet Wealth Management, which would rely on monetisation of eurozone sovereign debt.

He places a 45 per cent chance on the eurozone succeeding by deepening the fiscal union and the same chance on a total collapse of the union.

The Greek crisis has effectively split the eurozone in two, says Donay, into the ‘rigorists’, led by Germany, and the ‘solidarists’, led by France.

“This schizophrenia in the eurozone will continue to create tensions over fiscal and crisis management,” he adds.

Jim Leaviss, head of retail fixed interest at M&G Investments, says reforms in Europe are “necessary”.

“We will be back in this situation again – maybe with Greece, but potentially with any other eurozone member – unless Europe thinks about the flaws in the eurozone system,” he adds.

Key issues that need to be addressed include menchanisms to deal with deficits and surplus imbalances, and fiscal transfer between states.

Once the dust has settled on the deal, experts think that investors can return to looking at the fundamentals of the eurozone, which tell a better story.

“We have said many times in recent weeks that we continue to see value in European financial assets, regardless of what happened in Greece. That remains the case,” says Flanders. European bonds are also likely to benefit from favourable demand and spply factors in the near term, she says.

“The European economy is still getting traction, and this is being reflected in the good earnings momentum of European corporates,” she adds.

However, the uncertainty over Greece is not over quite yet, with domestic approval needed for the deal. Meanwhile, a large question mark still hangs over Tsipras’s head.

While the odds are down to 1/20 that a Grexit will occur, according to bookmaker Paddy Power, they are less favourable for Tsipras, with 6/5 odds that he will be out of office by the end of 2015.

“Certainly both the party’s popularity and unity will be put to the test as the terms of support are voted through,” says Paras Anand, head of European equities at Fidelity Worldwide Investment.

“Whilst markets will clearly reflect some relief … it remains to be seen the degree to which Tsipras is weakened by today’s announcement,” he adds.