28 JUN 2011
By Bill Hubard | FXStreet.com
So the Greek Parliament will vote Wednesday on the new austerity bill agreed upon last week in Brussels after consultations with officials from the European Union. A year ago, when the Parliament voted on the first austerity plan in order to receive the first bailout package they passed the measure 172 to 121; but the second trip to the well this week is expected to pivot on just a couple of votes, one way or the other. Should that vote pass there will be another vote Thursday on an enabling bill that will allow the government to swiftly implement the package. If the Wednesday vote fails, there will be no vote on Thursday, just a cacophony of recriminations. If it’s thumbs down on the first vote then it can be assumed that ????? will hit the fan and, barring a Plan B, Greece will not get access to the €12bn they need to meet debt payments that are due to be paid from mid-July through mid-August and there can be no doubt that it will mean default, no matter how it is described. A successful vote means that Eurozone finance ministers will gather on July 3rd in order to dot the I’s and cross the T’s on the second Greek bailout and release the funds for the upcoming Greek debt redemptions. A failure to pass the austerity package likely turns the July 3rd meeting from a Sunday picnic into a lost weekend nightmare.
While the markets will in all probability breathe a sigh of relief in the wake of a successful vote by the Greek Parliament on Wednesday it is worth remembering that a year ago the champagne had barely gone flat before there were renewed, and justified, concerns that a problematic outcome was merely delayed and not avoided. The second bailout programme has not silenced the critics. A UK based Eurosceptic group called Open Europe recently published a paper, “Abandon Ship: Time to stop bailing out Greece?” that encapsulated the sentiment of many non-believers. Firstly, the bailouts are a symptom of Greece’s debt trap, in which it remains stuck. Even with the massive economic adjustment, it will be close to a decade before Greece can achieve a growth rate needed to simply pay off the interest on its debt (at the moment, Greece pays 4.25% average interest rate on its debt). Due to the massive austerity measures and internal devaluation (meaning squeezes on jobs and wages at home), it is likely Greece will face limited economic growth for some time, meaning very limited tax revenues, while the country’s GDP is expected to shrink further. This also means that the overall stock of debt and interest payments will become larger relative to GDP or revenues. Interest payments will also continue to add to the debt burden since they are not countered by inflation or growth in revenues. Simply put, something will have to give.
Secondly, although the maturity profile looks heavily frontloaded, which contributes to the massive size of the bailout, under the debt rollover or swap plan some of this maturity will be shifted towards 2020. Although this may help reduce the level of direct loans needed it will not ultimately change the chances of a Greek default. In fact, combining some form of debt rescheduling with a large package of bailout loans will simply shift the peak of debt maturing to a later date and may even increase the level of debt maturing in quick succession. Even if it is able to return to the markets it would face a substantial amount of debt which needs to be refinanced. Ultimately, Greece will remain insolvent despite a boost in liquidity and will not be able to fully repay its loans.
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