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The situation is fluid. But, while our base case has been Greece remains in the euro (partly because of the pitfalls of exit & incentive of QE), a long-term debt restructuring looks inevitable & desirable.
Done well, it could allow Greece to lock into current low funding costs. It would reduce uncertainty, & put the onus on meeting its primary-surplus targets more via growth than austerity.
But, with Greece’s referendum offering impasse or fresh elections, an early agreement looks unlikely. Coping with the strains outside the euro would be even harder for Greece in the short term.
With only one fi fth of Greece’s debt held privately (the rest by offi cial institutions), & banks elsewhere in relatively better shape, contagion would more likely fl ow from leaving the ‘exit door’ o pen, than a direct fi nancial hit from a Greece default.
QE for Greece in late summer (best case) would be well timed, given the US Fed’s ‘exit’ from ultra-loose policy. This starts with its first rate hike since 2006, probably in September or December.
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Neil WilliamsSenior Economic AdviserNeil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks - including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 30 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea. Read all articles by Neil Williams