Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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DRACHMA DRAMA

After years of economic austerity measures, imposed by the European Union, the elevation of the left-wing Syriza party to govern Greece has the hallmarks of a Greek tragedy, fuelled by a deep mistrust of Greece’s many creditors.

As the eloquent narrators of disastrous events, Greece’s ancient playwrights are feted as the creators of tragic theatre. In his play Oedipus Colonus, the Greek tragedian Sophocles darkly observes that “trust dies; but mistrust blossoms.”

Greece’s economic woes are of tragic proportions. As a consequence of the global crisis of confidence regarding the country’s ability to repay its sovereign debt, in 2010 the European Union and International Monetary Fund agreed to a rescue package which provided an immediate €45 billion in bail-out loans. However by the following year, Greek public debt had reached €355 billion (around 170% of nominal GDP), with the size of the international bail-out now estimated at €240 billion.

Despite the entreaties of recently appointed Greek Ministers to re-negotiate the bail-out terms, there appears little appetite in Germany, or at the European Central Bank, to alter existing agreements. As a result, earlier this week, the former head of the US Federal Reserve Alan Greenspan predicted that Greece will have to leave the euro-zone, forcing the return of the Greek drachma for the first time since 2001, when Greece adopted the euro as its currency.

It’s a truism that financial markets favour certainty over uncertainty, with the potential impact of a Greek exit from the euro (or “grexit”, as it has been referred to), well aired over recent months. The initial impact would certainly be felt in Greece’s domestic economy, with the cost of living for the average household and the cost of doing business, quite likely to substantially increase. At best, the short-term effect on unstable economic growth could be severe. The extent of any ripple effect throughout the periphery of the EU is within the realms of speculation, with the European Central Bank’s programme of quantitative easing potentially lessening this risk.

However, it’s many of the other nationalistic policies of the new Greek government which may create more long-lasting risks to economic recovery. The privatisation policies of the pre-Syriza government had encouraged direct foreign investment in Greece, particularly by China, Russia and Qatar, with the former Greek government having intended to raise €11 billion by 2016. Last year alone, Greece and China signed shipping, trade and energy deals worth €3.5 billion. Future investment is now likely to be on-hold; not only are there risks to foreign investors if considering future investment, but the status of investments already made will also be of concern.

The drachma was one of the world’s earliest currencies. Its name derives from the Greek verb “to grasp” and its original value was equivalent to that of a “handful of arrows”. It’s said that the arrows of the ancient Greeks were symbols of wisdom and truth. Once shot from the bow, they represented consequences that could not be changed. Sophocles also once observed “the keenest sorrow is to recognise ourselves as the sole cause of all our adversities.” Whether an economic tragedy can be averted, is likely to be one of this year’s most compelling dramas.

By Gordon Noble-Campbell
Director, Private Client Services

This article was published in February 2015