Europe's Destiny Left To Greek Street Justice

The Greek Prime Minister, George Papandreou, is now starting to sell the EU/IMF rescue package to the Greek people as the county’s workers unions denounce what they see as “unjust” budget cuts. If Papandreou fails, Greece will be back to square one of its fiscal disaster. And the European debt crisis will probably spread further,  faster and with no mercy.

“We find ourselves before the most savage, unprovoked and unjust attack. The answer will be given in the street.”

Spyros Papaspyros

While there are still ongoing negotiations about the details of the rescue, the main components of the package were leaked last night to the Financial Times. The main components is said to be tax hikes, freezing and cutting wages, raising retirement age,  privatization of state corporations and sale of state-owned properties.

Still, several prominent experts believe the measures won’t be enough to save the Kingdom of Greece from bankruptcy.

The question about the package – and probably about any other upcoming rescue packages – is whether it can stave off insolvency.

As for Greece, we will have to see what the growth assumptions are before any solvency calculations can be done.

The details are expected to be announced over the weekend, including what exactly the headline number of €24bn refers to.

But rough estimates and comments by financial experts suggest that the overall size of the package will be sufficient to produce a primary surplus sufficiently large enough to stabilize the debt-to-GDP ratio.

In an interview with Die Welt, Moritz Kramer of Standard & Poor’s,  defended  the decision to downgrade Greek debt to junk status, adding that the bailout, while welcome, does not change the rating agency’s medium-term perspective on the country.

“Even if the aid will be increased, EU and IMF give away any money.  Rather, the loans to Greece in the future must still repay further.  It may be that the longer financing even mean that the government puts less discipline in the necessary consolidation of public finances in the day, though in the case of Greece so far indicates little to such a development,” the S&P chief economist says.

Based on past experience, there is a 14% chance that investors lose 50-70% over their investments over 10 years, Mr. Kramer says.

But past experiences is definitely one of the things that investors NOT should relay on in this unprecedented situation for the euro zone.

Rough Justice

Prime minister George Papandreou is now starting his attempt to sell the package to the Greek people as unions denounce “unjust” budget cuts, Bloomberg writes.

“We find ourselves before the most savage, unprovoked and unjust attack,” head of the ADEDY civil servants union, Spyros Papaspyros, says.

“The answer will be given in the street.”

The Greek newspaper Kathimerini have more on the unions reaction to the measures.

While signs of an accord ended a bond market sell-off in Europe yesterday, Moody’s Investors Service warns that Greece could be vulnerable to a “multi-notch” downgrade if measures don’t go far enough.

Such an action is likely to make the European debt crisis to spread even further.

E.U. Banks Unable To Borrow Money

The first signs of the next stage of this contagious disease is already beginning to show.

According to The Financial Times, it has the potential of developing into a whole new crisis.

“Many European banks have become shut out of the international lending markets because of continuing concerns over Greece, sparking fears that some could collapse as they run out of cash.  Greek and Portuguese banks cannot borrow in the international money markets, while weaker European banks are also struggling to raise money as fears of counter-party risk have grown sharply,” the FT reports.

Even French and German banks have difficulties because of their exposure to Greek debt. German, French and Spanish banks have had to pay higher premiums for short-term debt.

Portugal To Test The Markets

Meanwhile, Portugal is working on additional austerity measures.

The capital gains is raised to 20% and applies not only to investors residing in Portugal, but also traders and investors who sell Portuguese company shares, Jornal de Negocios reports.

An article in Jornal de Negocios reports that the Portuguese government will test the public debt market next Monday, announcing that it will hold an auction of repurchase about €5.6bn in 10y obligations that expires May 20.

Markets seem also willing to  give Spain a truce, according to El Pais, but investors expects more reforms, especially in the labor market.

If the government cannot deliver results soon, speculation against Spain will start again.

“The big problem of Spain is unemployment and that requires decisions,” the Spanish newspaper writes, adding that more collaboration between social partners and the government also will be needed.

Need A Plan B, Perhaps?

In a commentary written before the latest agreement, Nouriel Roubini and Arnab Das argue that the austerity approach to the sovereign is fought with risk, likely to produce deflation, and may ultimately fail.

They kindly suggest to pursue a plan B with the following characteristics:

“This would involve a pre-emptive debt restructuring for Greece; a strengthened fiscal adjustment plan in the euro zone periphery; far-reaching structural reforms; a larger IMF/European Union programme to help Greece and prevent contagion to others; further monetary easing by the European Central Bank; fiscal and domestic demand stimulus in Germany; and a co-ordinated effort to address the institutional weaknesses of Europe’s economic and monetary union.”

“Much time has been lost in denial, but if the following steps are taken it might not be too late to avoid a disorderly outcome. First, use the experience of earlier emerging market “test cases” for sovereign debt restructuring. Second, prepare an exchange offer with a menu of options for the range of private creditors. Third, use some of the planned official support to provide credit enhancements for the new public debt; use the rest to provide financing for the ongoing deficit at reasonable interest rates. Fourth, use the time lent by the stretched maturities and reduced net present value of the debt to implement a comprehensive structural reform programme to boost competitiveness,” they write.

Absence Of Political Leadership

Philip Stephens writes in his latest FT column that the E.U’s pitiful handling of the crisis suggests that the future of the European Union can no longer be easily ascertained.

“Europe no longer carries the stamp of inevitability. Quite suddenly, it has become almost as easy to foresee a future in which the Union fractures. The risk is not so much of a great rupture – though if Greece defaults the immediate shocks will be profound – but of the atrophy that flows from the absence of political leadership.”

You might also be interested in reading the latest commentary on the Greek situation by chief economist David Rosenberg with Gluskin Sheff at Zero Hedge.

(Money) From Europe With Love

And here’s a little greeting from all the major European banks to the government of Greece:

“One time you were my favorite chicken – now you’ve grown into a fox”

Related by the Econotwist:

Panic Hits Germany – Europe On Fire

Euro Area Under Massive Speculative Attack

Merkel To Push The Euro Zone Off The Cliff

86% of German Citizens Oppose To Greek Bailout

Euro Collapse As Greek, Portugese And Spanish Spreads Widen

Europe’s Debt Crisis Now Spreading To Portugal

“Germany Is Unfit For The Euro”

Greek Crisis Force Germany To Put Help For Unemployed On Hold

The Great Greek Soap Opera

Markets Still Don’t Trust Europe’s Greek Aid Pledge

Germany Forced To Accept Greek Bailout

Greece: Here’s The Deal (Well, sort of…)

Greek Crisis: Confusion And Paranoia

Here Comes Another Greek Bank Meltdown

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