Greece on the Brink…Again

07.22.12

Greece on the Brink…Again

07.22.12
Simon Dawson/BloombergSimon Dawson/Bloomberg

Just one month after the so called “make or break” election, the state coffers in Greece are running low as tax revenues continue to miss targets as the economy slows further. The election outcome, dubbed by European political leaders as a victory for the euro, was supposed to ensure that the bailout programme be implemented in order to move Greece back onto a sustainable economic path. Since then the emphasis in Greece has shifted towards a renegotiation of the bailout conditions as the austerity measures hit living standards. A recent statistic published by Eurostat claimed that 27.7 percent of Greeks are now living on or below the poverty line. Such rhetoric is falling on deaf ears elsewhere in Europe as leaders in countries such as Germany, Finland and the Netherlands struggle to sell each of the bailouts to their respective electorates further highlighting the North-South divide in the Eurozone.

Recent figures released suggest that Greece is making progress towards reducing its deficit as the figure for the first six months of 2012 came in at 12.3 billion euros well ahead of the Troika target of 14.9 billion euros and down from 13.1 billion euros from the same period in 2011. However, a closer inspection reveals that, whilst spending cuts are being met, the required taxation income was 1 billion euros behind the plan during the first half of 2012. One consequence of this is that Greece will struggle to survive financially until September when the next bailout tranche is due to be made payable.

The main impasse is two bonds that mature on August 20 when Greece is due to repay 3.2 billion euros of debt owed to the European Central Bank (ECB). With the ECB insisting on repayment in full, and with 4 weeks to go, Greece simply does not have the cash to meet this commitment. Aside from a potential bridging loan, which has little support across Europe, Greece would be forced to issue short dated debt at a highly expensive rate of interest to cover this liability and to avoid a default. Clearly this is not a sustainable solution, as any positive deficit reduction effort would quickly be offset by the high financing costs of avoiding a messy default.

As if this wasn’t enough, a decision on Friday by the ECB to refuse Greek Government bonds as collateral for direct funding will place further strain on Greek banks’ ability to fund them and to maintain solvency. The effect of this decision is that struggling banks in Greece (which is nearly all of them) will be forced to borrow via the Bank of Greece at about 2 percent above the rate that could have been obtained directly from the ECB.

Again this outcome is not sustainable for any amount of time as any further banking collapses in Greece would trigger further chaos in financial markets as Eurozone leaders would have to weigh the merits of yet another Greek rescue package. Any sign of doubt or hesitation would no doubt trigger turmoil and contagion across to Europe’s other troubled regions and could act as the stimulus for an immediate break-up of the Eurozone. The tale of the tape here is that progress towards overall crisis resolution has not been made, as a solution for Greece still needs to be found.

A decision must be made whether to provide an astonishing third bail out to Greece or to let the sovereign bust out of the common currency area. Any more political deadlock could likely spark financial Armageddon in the Eurozone in the very near future.

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