Greek troubles
July 1st, 2011
This week saw the Greek Parliament approve the austerity package the IMF and EU have helped design for their country. Markets were relieved that the vote went through. They believed the IMF when it said it would not continue to provide loans to Greece if the Parliament vetoed the package. That would have meant an early default on Greek debt. The markets can look forward to a longer period to Extend and Pretend – the international community will extend more credit Greece, and all will pretend she will one day pay it back.
We think markets should be more worried than they appear to be. Whilst the vote went through, there was not much sign that the Greek government had won over the minds, let alone the hearts, of the voters. Angry scenes on the streets of Greece imply it is going to be difficult to implement all of the cuts. Democratic governments can only deliver their policies if they have sufficient consent from the people.
The new Head of the IMF recognised this by calling on the Greek Opposition to support the cuts. She was right that it would have helped implement and sell the cuts to the Greek people if the Opposition had offered its support. As it was it made it a bad first day at the office for Mrs Lagarde. The Greek Opposition dug in and voted against the measures. The Opposition clearly thinks the public have a point to express their displeasure. They want to leave open organising and supporting the popular opposition to the government’s enforced policy of more austerity.
Greek output is falling. This will make it more difficult to raise the revenues the state needs. A country which depends on successful tourism has done itself few favours by allowing the world to see pictures of disruption as the main image of the new Greece. Nor will it ensnare more inward investors and foreigners wishing to buy privatised assets. Locked into the Euro Greece is unable to devalue to make her goods and services cheaper. She is unable to print more Euros to make paying loans back that much easier. Meanwhile with inflation rising in Germany the ECB is making it more difficult for the struggling parts of the Union, as it is tightening policy.
The French are busy making plans to roll over and ease the terms of Greek debt. They are the realists. It may not be called a default, but people are planning for one nonetheless. We continue to advise people to avoid EU banks and distressed sovereigns when investing. This problem is not over. A couple of Greek votes cannot fix it.
