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Saturday 18 August 2018

Dan White: Austerity vote is far from the last chapter of this Greek tragedy

IN the end, despite the fierce opposition of the main opposition New Democracy party and riots in the streets outside, the Greek parliament voted by a relatively comfortable 155 to 138 margin in favour of Prime Minister George Papandreou's programme of €28bn in tax increases and public spending cuts and a €50bn sell-off of state assets.

However, far from preventing a Greek default or a partial break-up of the eurozone, the Greek parliamentary vote has merely postponed the day of reckoning, probably by no more than a few months.



SOLVENT

While the latest vote removes the possibility that Greece will go bust next month, unless the country can agree a second bailout with the EU and the IMF, it will run out of cash by August at the latest. Even a second bailout will only keep Greece solvent for another year, perhaps two at a push.

The basic problem, which neither the 2010 Greek bailout nor this week's parliamentary vote addresses, is that Greece can at best hope to repay half of the €340bn it owes its creditors.

That is what both the bond market, where Greek government bonds are trading at less than half of their face value, and the market for credit default swaps, the instruments which investors use to insure against the risk of default, are saying.

And what has been the response by the EU to the glaringly obvious need for Greece to massively write down its debts? Sweet Fanny Adams. Apart from French president 'Nasty Nic' Sarkozy's plan for French banks, who are owed €65bn by Greece, to extend the repayment period for some of their Greek loans for up to 30 years, Europe's leaders have had nothing to contribute to resolving the crisis.

Even the French plan, which would have been greeted as a radical step if it had been announced at the time of the original bailout, is now too little, too late.

So where do we go from here? Assuming the Greek parliament today passes the detailed enabling measures needed to pass the austerity programme into law, the next step is convincing a deeply hostile Greek public that the latest austerity programme, the second inside 14 months, is a sacrifice worth making.

While this week's rioting outside the parliament in Athens had a suspiciously ritualistic quality about it, there is no doubting the anger of large swathes of Greek public opinion. So far the violence has been largely confined to the lunatic fringe but it might not be a good idea to bet on it staying that way.



ANGRY

Although it still remains a long shot, the possibility of the Papandreou government being literally chased from office by an angry populace, as the Argentinian government was at the time of that country's default in December 2001, can not be completely discounted.

Even if public anger doesn't boil over, some sort of Greek default is inevitable. The only question is when. If the EU and the ECB inhabited the same world as the rest of us this would take the form of an orderly restructuring of Greek debts with all of the country's creditors forced to take a "haircut".

With the markets having long since concluded that a Greek default is inevitable, the EU and the ECB's argument that recognising this reality would trigger a Lehman-type crisis is absurd. Unfortunately what could very well cause such a crisis is a disorderly Greek default, which will be the inevitable result of their refusal to permit an orderly debt restructuring.

If, or more likely when, that happens, not alone will Greece default on its debts but it, and perhaps several other peripheral countries, will exit the eurozone also.

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