22 februari 2012
Edwin Gutierrez, portfolio manager in Aberdeen’s emerging markets bond team, visited Greece at the beginning of February where he met with various members of the domestic financial community and representatives of international institutions. Please find attached a summary of the trip and his key findings.

As history has shown, there are only three ways out of a debt trap: 1) the Baltic or Irish solution of internal deflation; 2) grow your way out and 3) restructuring.

With no political willingness to endure the shock therapy of deflationary adjustment and limited prospects for sustained economic growth, further restructuring seems inevitable. Otherwise, the best Greece can hope for is a Jamaica-style muddle-through. While the latter has avoided a wholesale restructuring of its debt, it has failed to experience growth for almost two decades. Moreover, Jamaica has only been able to stave off restructuring by running on average a 6% of GDP primary surplus per annum. Even the most optimistic of Greece observers would doubt the Greek political class' ability to commit to such austerity.

Finally, while all Greek observers with whom I spoke argued that departure from the Eurozone would be a disaster - only one taxi driver voiced that in the end it would ultimately be better for Greece - without a commitment to internal adjustment from its political class, I struggle to see how Greece will be able to compete in the global economy going forward. The fact that Prime Minister Papademos has asked for a paper from the finance ministry on the ramifications of Greece leaving the euro means that it is no longer the unconscionable event that it once was regarded. Dropping out of the euro would undoubtedly be more painful in the short term. It could, however, be the only way that Greece is able to deliver the necessary competitive adjustment, just like Russia, Argentina and Indonesia were able to do through the overshoot of their respective currencies. While these maxi-devaluations were incredibly painful for those countries, they did help usher in a period of prolonged economic growth. It may be the only way for Greece to have a fighting chance for the future.

Without a commitment from the political class to make the necessary structural adjustments within the euro, it may have no choice. A continued lack of confidence in policy will ensure that capital flight is ongoing. Despite the fact that 77% of the populace favours retaining the euro, ultimately, the ensuing liquidity crunch and contraction of the monetary base would make the existing currency arrangement untenable without offsetting liquidity injections from the ECB. Assuming that Greece does not completely go the way of heterodoxy – yes, this could be a big assumption – then this could be when there is opportunity to unlock long-term value. Hedge funds and private equity firms are already circling in Athens, looking to pick up cheap assets. But until the currency risk is out of the way, there is no reason to rush into purchases of Greek assets.