Greek lessons for the eurozone

by Gavyn Davies

Financial Times
February 12, 2012

The Greek Parliament votes tonight on the latest austerity package, which Prime Minister Papademos says is essential if the nation is to avoid default, departure from the eurozone and economic chaos. If the motion fails, then markets will need to contemplate whether the euro can survive the contagion which would be caused by disorderly default on Greek debt.

In the more likely event that the motion is passed, and other political conditions are met, then the eurozone group of finance ministers is likely to approve the package on Wednesday. The second official bail-out of €130 billion would then go ahead, subject only to final agreement on private sector involvement (PSI) for debt write-downs of €100 billion.

Since agreement on PSI is also likely, the bail-out funds should flow before Greece needs to redeem €14 billion of government bonds which fall due on 20 March. Where does this leave Greece, and what are the lessons of the Greek deal for the rest of the eurozone?

For Greece, the immediate liquidity needs of the nation would be met, once again solely from official lending. And that would remain the case for as long as the government can hit its fiscal targets. Despite being widely criticised for failing to hit most of its previous targets, Greece has in fact improved its primary budget balance by about 8 percent of GDP since 2009, which is not exactly a negligible effort. Nevertheless, few economists believe that it can reduce its public debt ratio to the targeted 120 per cent of GDP by 2020, unless there are further write-downs of debt, including write-downs of public debt, and also more austerity packages from Athens. The question is whether austerity fatigue will set in long before the financial crisis is over.

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