G8 Opportunity Squandered
The G8 communiqué affirmed an “interest in Greece remaining in the Eurozone while respecting its commitments” but there was no sign of compromise on either side of the austerity-growth debate – all sides merely restated their existing positions and US President Obama summed up the mood admitting there is still “more work to do”. Attention now switches to the upcoming EU Summit on Wednesday where France’s President Hollande plans to raise the concept of common-issuance Eurozone bonds once again. The chances of a breakthrough seem very slim to us, and the best that can be hoped for is a symbolic gesture towards a growth-friendly approach – but confined to supply-side structural reforms only rather than demand-boosting steps from the fiscal side. Moreover, it would be still too early to hope for measures on a Eurozone-wide deposit insurance system. Meanwhile the news flow out of Greece has turned more mixed, which represents an improvement of sorts after two weeks of predominantly euro-negative headlines. The Bank of Greece has strenuously refuted weekend reports in the Greek media about a possible imposition of limits on deposit withdrawals. Also, it seems election victory for the anti-bailout SYRIZA party is by no means a certainty– two of the four polls published over the weekend show the pro-bailout mainstream New Democracy party topping the polls by a slender majority. Bundesbank President Weidmann sounded warnings however that it would not be “right for the euro system to further increase its level of risk for Greece”, suggesting the policymaker is becoming increasingly concerned about the size of TARGET2 imbalances within the Eurosystem of central banks. Concerns about the size and nature of liquidity provision to the Greek banking system may also be uppermost in his mind. Our European economics team estimates that in the case of a Greek exit from the euro, the cost to European taxpayers could amount to EUR225 bn or 1.8% of Eurozone GDP – almost four times the projected EUR60 bn (0.5% of Eurozone GDP) burden if Greece stays in the euro and undertakes what we would view as another inevitable debt restructuring. Of course, this only takes into account Greek debt write-downs, not such second-round effects as the threat of bank runs in other Eurozone countries.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank