Many investors wish to wave a final goodbye to the disruption the Greek debt crisis has had on market valuations. Meanwhile, European politicians are already trying to move away from the dramas on the periphery and focus on restoring growth in Europe. Both impulses are understandable. Unfortunately, they are premature.
The debt reduction agreement put in place last week is the biggest sovereign restructuring ever. Yet it only goes part of the way in helping Greece overcome its core problem of too much debt and too little growth. And it won’t be long before this latest deal also comes under pressure.
What the debt reduction deal really delivers is a bit more time for others to reposition for the next, more disruptive, act in this unfolding Greek drama. For European policymakers, this means even more urgent building of firewalls to protect countries such as Italy and Spain, continuing to strengthen the core through better fiscal and political integration, and forcing banks to raise capital. For investors, it is about reducing their exposure not only to default by Greece, but also risks connected with a potential exit of Greece from the euro. Continue reading »