Friday, July 1, 2011

Greece still needs to address its solvency issue, otherwise bailouts mean nothing

Greek Prime Minister Papandreou has narrowly averted economic disaster as parliament agreed to the Greek austerity measures.

This will lead to a further bail-out of the country and fends off the risk of default. The austerity measures will see a €28 billion (£25 billion) package of tax increases but he now faces unrest in the country and like the mythological Greek king Sisyphus - condemned to roll a boulder up a hill only to have it roll back down again just before reaching the top - will have only survived one crisis in order to face the next.

Unless Greece can pull off the seemingly impossible and grow its way out of debt, which we doubt very much, the solvency issue will still have to be tackled.

However, delaying the inevitable is the best option.

It hasn't been spelt out explicitly but European officials are at present trying to follow a course of managed default. They are using liquidity measures as a way of trying to delay a default for as long as possible, in the hope that the banking system will be better placed to deal with it later rather than sooner.

Indeed, the numbers show that the more time passes the more peripheral debt will shift from the private sector into the hands of Europe's bailout fund and the European Central Bank.

Delaying a managed default also gives the Greeks a chance to eliminate their primary deficit, which excludes interest payments, first. (read more)