Financial Times
February 13, 2012
On Sunday night, as Athens burned, the Greek parliament voted to approve an omnibus bill. It contained the main elements of an agreement with the Troika on fiscal austerity, privatisation and structural reform, and the recapitalisation of Greek banks. Was this a ‘make or break’ moment for Greece?
A rejection of the deal by the Greek parliament, a disorderly Greek sovereign default and euro area exit would certainly have been disastrous for Greece. Not only would the Greek financial system have probably collapsed in weeks or even days but the transition period to a new drachma would in all likelihood have been chaotic and the resulting very large currency depreciation more painful than stimulating.
But even the Greek parliamentary “yes” is little more than a minor milestone on a long road. Many steps are needed just to avoid disorderly default on the impending bond repayment of €14.4bn in late March.
The Greek government needs to find an additional €325m in spending cuts and the leadership of the main Greek parties needs to commit in writing to stick to the agreement even after the next Greek election before the eurogroup signs off on the agreements (likely this week).
That would still leave parliamentary approvals in Austria, Germany, Finland, the Netherlands and Slovenia and the timely completion of the debt swap with the private creditors (the German vote will probably take place on February 27).
Even if disorderly Greek default is avoided on March 20 (our base case), Greece is far from home safe. The agreement includes additional austerity measures and a debt swap that – under very optimistic assumptions about economic growth and fiscal deficits – would reduce Greek general government (gross) debt to 120 per cent of gross domestic product by 2020.
If the present agreement holds out, the hope in about eight years’ time is that Greece is in a similar position to that of Italy today. But without Italy’s high level of private wealth.
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