All Articles

Greece and "Super" Mario

Mike Keogh

In light of the "snap" elections in Greece this weekend, Michael Keogh, Associate Director of Research & Strategy, discusses the current economic state of the country.

Once again, Greece goes to the polls this weekend. With the radical leftist Syriza party looking popular, it would seem Greece is on a collision course with its international lenders. Having edged below 6% last year, Greek 10 year bonds are now +9%. Ironically, this has come at a time where there are signs of improvement in the Greek economy, which grew 0.7% quarter-on-quarter in Q3 2014.  But this hasn’t come without cost. The Greek economy has fallen 25%, earnings by a third, and half of those under the age of 24 are unemployed – with years of IMF financial control of economic policy ahead. What is likely to exist is a stand-off between the new ruling party, who are keen to re-negotiate existing funding agreements, and Brussels, who will not want to fuel further anti-European political discontent and agreements on fiscal reforms by softening lending criteria. Whatever the final agreement is, a Greek exit from the euro would seem unlikely. It continues to be the case that neither Greece- including the majority of Syriza party members- nor the EU has any interest in such an outcome as it would be ruinously expensive and painful for both sides. The fact that Greece remains a demographically older country, with substantial pension savings, largely denominated in euros, remains the biggest argument why there is little incentive for Greece to openly contemplate leaving the euro area. Who will blink first? Expect some very modest form of funding concession, but not sufficient to discredit Brussels, whilst the rest of the EU hope European QE succeeds in giving the region the kick-start it needs. 

As leaked, although larger than markets expected, the ECB will inject €1.1bn into Eurozone bonds from March, by buying €60bn of sovereign debt per month (and some asset-backed securities) until September 2016, in a bid to cut interest rates for companies/consumers, in order to ignite investment and spending. The ECB believe that this will ultimately tackle the lack of growth and deflationary fears in Europe. Unsurprisingly, the initial market reaction has been a broad rise in financial markets, and bonds to fall (further). So what does this mean for real estate? Cheap money, and the prospect of continued low rates provides major support. As does the sector’s increasing positive income spread, in an income-deprived world whereby there are billions of negatively yielding government debt in the Eurozone. Evidence of pockets of rental growth, either through growing occupier demand or a lack of development, only adds fuel to the theory that property looks well placed to enjoy another good year. QE and the oil price slump will take some of pressure off Europe in 2015, but Mario Draghi was right to state that “QE needs to be complimented by the determined implementation of product and labour market reforms, as well as actions to improve the business environment for firms,” or else the goodwill will be short-lived. 

 

This article is intended solely for the use of professionals and is not for general public distribution.

 
Any assumptions made or opinions expressed are as of the dates specified or if none at the document date and may change as subsequent conditions vary. In particular, the document has been prepared by reference to current tax and legal considerations that may alter in the future. The document may contain "forward-looking" information or estimates that are not purely historical in nature.  Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass.  International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed.  Rates of exchange may cause the value of investments to go up or down.  Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer’s opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Nothing in this document is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment.  It does not form part of any contract for the sale or purchase of any investment. TIAA Henderson Real Estate (TH Real Estate) is a name under which Henderson Real Estate Asset Management Limited provides investment products and services. Issued by Henderson Real Estate Asset Management Limited (reg. no. 2137726), (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN) which is authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored.
Michael Keogh

Mike Keogh

Director of Research

Mike's biography