Greece Remains In Economic Death Spiral Despite New Government

Analysis

on June 20 2012 9:19 AM
  • Greece
    A presidential guard marches by a newspaper stand featuring news about Greece's election results in Athens
  • Laocoon strangled by snakes. Greece faces economic calamity despite recent elections.
    Laocoon strangled by snakes. Greece faces economic calamity despite recent elections. Wikimedia Commons
  • Greece
    The formation of a new Greek government Wednesday staves off fears of a swift departure from the euro zone by the Hellenic Republic. But this week's election and installation of a new administration merely extends the country's economic death spiral as its economic woes remain deep and pervasive. REUTERS
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The formation of a new Greek government Wednesday staves off fears of a swift departure from the euro zone by the Hellenic Republic. But this week's election and installation of a new pro-austerity administration merely extends the country's economic death spiral as its economic woes remain deep and pervasive.

It will take a lot of time, a lot of work and a lot of tears before those woes recede.

The election of a New Democracy-led government didn't change the near-term outlook for Greece, according to Wells Fargo Securities Global Analyst Jay Bryson.

The election result in Greece and the final round of the French electoral process being out of the way are not going to be the catalysts for the ... rally investors are waiting for, a European strategy note from Nomura Equity Research aptly title 'The Greeks decide, but nothing changes,' said.

What the election did was reduce the possibility of a near-term big negative. If Syriza had won, Greece's and the Troika's negotiations could have become quite complicated ... it would have been a bit mess, Bryson said, adding that a victory by the left-leaning Syriza party would have made the departure of Greece from the euro zone more likely.

However, Greece still has a lot of work to get its financial house in order, and it will require some willingness by the Troika (the European Central Bank, European Commission and International Monetary Fund) to renegotiate some of the terms of the current bailout plan and austerity measures. While New Democracy is not as anti-austerity as Syriza, the party is still expected to pursue a modest renegotiation of terms, according to Bryson.

Continuing economic tension and fierce opposition in the Greek parliament are expected to destabilize the newly elected government in the medium term, according to a Sunday research note by Goldman Sachs analyst Themistoklis Fiotakis. Syriza increased their voting share in the parliament on Sunday to 27.1 percent from just 16.8 percent in May on an anti-austerity platform. Moreover, the newly formed Syriza-led opposition will likely continue to follow a party line of fierce opposition to the coalition government that may emerge.

New Democracy and its coalition partners will have to either overcome the opposition or figure out a way to work with them if the Greek government will be able to stave off an eventual exit from the euro zone and restore economic health. New Democracy is expected to negotiate with the Troika -- The International Monetary Fund, the European Central Bank and the European Union -- to adjust the current austerity requirements and deficit reduction goals. Under the current plan, the Troika is requiring that Greece achieve a budget surplus of 4.5 percent of GDP by 2014, but the country is starting from a deficit of 5 percent of GDP in 2011.

A number of years of belt tightening are ahead of them, a number of years of pain, Bryson said, speaking about the Greek people. The current government is in the unenviable position of looking for the least worst option between trying to renegotiate the bailout deal with the Troika or leaving the euro zone.

Greece's only hope for funding now rests with the Troika powers as private investors have sought to disentangle themselves from the struggling republic. To make matters worse, the Greek people themselves have been withdrawing their savings from banks for months, a trend that accelerated in recent weeks to at least $1 billion a day.

I don't think you're going to see a lot of that money flying back into Greek banks anytime soon, Bryson said.

To continue to stay in the euro zone, the Greek government is going to have to carry out some clear and decisive actions, according to Bryson. Greece will have to reaffirm its commitment to some level of austerity, sell state assets (possibly including the infamous Greek rail system), reform labor markets, raise the retirement age and decrease pension benefits.

Selling state-owned assets will be a key short-term step as it will raise cash that can be immediately used to reduce outstanding debt. Likewise, swift changes in the retirement age and pension system would be viewed favorably by the Troika. The government will also have to devise ways of improving tax collection.

Taxes are already high, and if you don't already have the infrastructure in place, people are going to try and avoid them, Bryson said. However, spending cuts will remain the priority in the short term.

Greece is like Tantalus, a mythical Greek figure condemned to perpetual punishment as he stands in a pool never quite able to eat delicious fruit barely out of reach or drink refreshing water. The fruit of economic growth is always out of reach and the life-giving water of Troika aid is always in danger of flowing away. The New Democracy party and its coalition partners are working on a plan to ask the Troika to extend the timeline for meeting deficit reduction goals, a move which would necessitate increasing the €173 billion ($218.7 billion) bailout by another €16 billion, according to the Wall Street Journal. However, that request will put the government in direct conflict with its European partners and German Chancellor Angela Merkel.

Merkel told reporters at the G-20 summit in Los Cabos, Mexico, that Greece's new government must fulfill their commitments quickly. Those commitments include a swift reduction in the budget deficit, which will necessitate even deeper austerity and spending cuts, something which even the New Democracy-led government is loath to do.

The current deficit reduction and austerity goals are not realistic according to Bryson.

New Democracy and their coalition ... are probably more likely to negotiate with the Troika, Bryson said, but they want to engage in serious negotiation with the Troika about 'how are we going to change the austerity program if we're going to stay in [the euro zone].

The country is under extreme economic pressures that are likely above and beyond austerity; prolonged uncertainty have led to a multi-year suppression in confidence and a collapse in credit growth, Fiotakis wrote. Unless both the Troika and Greek government fully commit without any room for uncertainty, moderate solutions will be prone to marginalization, while extreme and populist views could become ever so prevalent.

If the Troika and Merkel refuse to budge on extending the bailout deal and allowing the Greeks a sip of water, a Greek departure from the euro zone could be back on the table, even with the New Democracy-led government. Calamity may still be just around the corner in Athens.

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