Thursday, February 16, 2012

Greek default now inevitable / Irish Independent

The tentative deal agreed by Greece's political leaders for a second bailout does not signal an end to the saga, not by a long way. And even if Athens does finally secure its new funding, the long-term prognosis is still not good.
With Greek economic output in freefall, a messy debt default followed by the country's ejection from the eurozone now looks very much like a question of when rather than if.
In truth, with debts of more than €340bn, an uncompetitive economy and an utterly dysfunctional taxation system, a successful Greek bailout always seemed like a long shot.
The first May 2010 bailout failed to do the trick and the second Greek bailout, agreed in principle as long ago as July 2011, has still not been finalised. Hopes that the installation of a "technocratic" Greek government in October 2011 would speed up the implementation of the July deal, which involves further tax increases, spending cuts and public sector layoffs, have proved to be premature.
With German Finance Minister Wolfgang Schauble stating that the latest austerity measures being proposed by the Greek government don't meet the requirements of the second July bailout, it is clear that we are finally approaching a denouement.
It should now be as clear as daylight that the second Greek bailout won't work because it can't work. The latest economic data from Greece, which show that manufacturing output fell by 15.5pc in December compared with the same month in 2010 and that the unemployment rate had climbed to almost 21pc in November, demonstrate that the Troika-mandated austerity is proving to be counterproductive. That far from restoring fiscal stability, the July bailout, under which Greece would still have a crippling 120pc debt/GDP ratio by 2020, is making the problem even worse.
This makes an early Greek debt default followed by its departure from the eurozone and the return of the drachma inevitable.
Fortunately, the time that has passed since last July hasn't been completely wasted. New ECB president Mario Draghi has moved quickly to pump fresh liquidity into Europe's stressed banks, and indirectly into sovereign bond markets as the recent sharp fall in Irish government bond yields demonstrates. This means that the rest of the eurozone is now much better placed to absorb the shock of an imminent Greek debt default and withdrawal from the single currency than it was seven months ago.
Whatever short-term disruption it might bring in its wake, a Greek default would probably on balance be good news for this country. Not alone would it free up time and space at European level to allow for a renegotiation of our banking-related debt, without which we too will require a second bailout later this year, a desire on the part of our European partners to avoid a repeat of the Greek debacle would greatly strengthen the Irish Government's hand in such negotiations.
Irish Independent

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