Greek Relief Is Old News to Markets

Ladies and gentlemen, Greek Prime Minister Alexis Tsipras has worn a tie, which means spring will start early next year! Kidding! Actually, the firebrand-turned-compliant-reformist pledged he would don a necktie only when Greece received some debt relief. Greece and its creditors are saying this is the case after reaching a “historic” agreement in Luxembourg last week. The debt-relief deal is the latest in Greece’s long road back from the abyss and a reminder that markets can and do move on from a crisis well before the turnaround appears complete to the naked eye.  

The deal gives the Hellenic Republic an extra 10 years to pay back about €96 billion of loans, or about 40% of what Greece owes the eurozone. Additionally, the agreement defers interest payments and amortizations another 10 years, pushing the earliest repayment deadline to 2033. Creditors will also lend the country €15 billion to pay its IMF loans and add to its cash reserves, leaving Athens with about €24 billion to meet its financing needs for the next two years.

Both parties are applauding the accord. Greece gets a short-term cash buffer ahead of its bailout program exit in August—a relief for its weary citizens. Creditors didn’t provide an explicit debt write-off, assuaging concerns (particularly from Germany) of being too soft. Meanwhile, some observers pointed out that Tsipras committed to decades’ worth of austerity, basically ceding sovereignty over economic policy. This is far from what many expected when the radical leftist populist took power nearly three and a half years ago. In our view, it is a timely reminder that populists moderate like all other politicians, so watch what they do, not what they say. 

This debt relief deal is the latest positive news for Greece. The country will soon exit its bailout program after implementing economic and structural reforms to creditors’ satisfaction. Privatization progress has been slow but moving forward. In February, Greece raised new money on capital markets for the first time since 2014. Broad economic data have been improving, as Greek GDP grew for a fifth straight quarter in Q1.

While the Grecovery^[i] seems to be in the green shoots stage now, forward-looking markets moved on from the crisis years ago. Let’s go back to 2015, when Tsipras and his Syriza party’s new government made headlines for both its euro exit threats and hunky ministers. That summer, Greece and the eurozone agreed to terms on a third bailout after contentious public and private debates. Greek stocks suffered, but the news didn’t faze broader markets as badly—not then and not since.

Exhibit 1: Greece’s Problems Aren’t the Eurozone’s—or the World’s

Source: FactSet, as of 6/26/2018. MSCI Greece, MSCI EMU and MSCI World (returns with net dividends), indexed to 100 on 12/31/2014, 12/31/2014 – 6/25/2018.

In our view, stocks are the best discounters of widely known information, focusing most on the next 3 – 30ish months. When Greece seemed like it was on the verge of crashing out of the euro, its stocks reflected plummeting sentiment. Since then, Greek stocks have largely muddled along over the past two years. To us, this shows how the market is, as legendary investor Benjamin Graham put it, a weighing machine. Sentiment can knock stocks in the short term, but over time, the market pretty accurately reflects all known information. Since the crisis, Greek markets have signaled that while the country still faced numerous hurdles, the worst pain was likely in the rearview mirror. Global stocks, meanwhile, have long since gotten over the crisis.

This doesn’t mean everything in Greece is now peachy. The IMF has voiced concerns over the country’s longer-term debt sustainability. Other experts have pointed out the politics wildcard and possible uncertainty a new government could introduce. Greece has made reform progress, but it still has a ways to go. Yet many of those widely discussed issues are outside the 3-30 month timeframe markets care about. More importantly, they are also all mere possibilities, not etched in stone. Worries of unsustainable debt overlook the positive scenario in which Greece methodically refinances its obligations at benign rates as the economy grows. Either scenario is possible, but it is unknowable today. Markets move on probabilities, not possibilities, and we don’t believe anyone can handicap the former that far in advance. Today, markets are well aware of Greece’s progress and struggles—little is likely to surprise right now.

Greece has come a long way from regularly spooking markets in the summer during the eurozone crisis days of the early 2010s.^[ii] While some are applauding its progress, others aren’t as cheery. Many Greeks likely find the exit agreement underwhelming. But they have an exit agreement, which is in general good news—news markets have long reflected.