Tomorrow is D-day for Greece and, by extension, for the Eurozone's immediate future. With risk indicators heating up, a supervisory visit from the troika (the Central European Bank and the International Monetary Fund) will determine whether we see a sixth round of recovery designed to bail out the Greek economy. It would entail 8 billion euros in aid that will supplant Papandreou's government, which is each day exhausting its capital supply and closer to defaulting on government salaries and pensions.
All indicators suggest that the triumvirate will give its approval. ECB president Jean-Claude Trichet has spoken energetically about the issue, and yesterday he stated that he has absolute confidence in Greece?s ability to meet its fiscal obligations as laid out by the austerity plan. President of the European Council, Herman Von Rompuy, echoed Trichet's opinion according to sources from Germany.
Greece is technically bankrupt given that markets continue to discount the country with repeated stock market plunges, especially shares in German and French banks that are exposed to Greek risk. But to ward off the first real default of a euro country and the subsequent chain reaction that would follow is more a question of political will than financial numbers. Clearly, Athens will comply with the recovery plan. Facing debt totaling more than 160% of its annual GDP and a deficit of over 18 billion euros as of August, Greece?s federal government decreed more austerity measures in extremis. And a new tax that will incentivize home buying, could bring in 2 billion euros and, most important, foster goodwill among its financial benefactors who are busy with exit strategies for getting out of the Greek chaos and risky euro. If either falls, there will be a domino effect that spreads to financial institutions and global markets that are invested in Greece. Spain and Italy are particular vulnerable.
Stark stepping down from a leadership role within the ECB (a detractor for bond purchasing) and the substitution of Germany's vice minister of Finance, Joerg Asmussen (more transparent for the EU?s political needs) could position himself as a critical boost for Greece. This is something that could ease the troika's ability to reach an agreement and relax investors?and could even translate into a slight stock market rebound after the sudden blows that have hit it recently. Aside from this, Greece ought to stay disciplined through year end as it faces upcoming changes. And the European political machinery ought to decide in August about the possibility of a Euro bond. For now, the EU could be looking for opportunities to negotiate the creation of a European debt agency.
Ireland and Portugal, the other two peripheral countries undergoing a bailout process, are giving off positive signs according to the latest reports. Both unsustainable, Italy and Spain are another issue altogether. Yesterday, the European Commission reprimanded the Spanish government for not paying off their debt, despite the fact that they are burdened by extreme regional government overspending. The EC's worn and unresolved mantras have led to constitutional reform within Zapatero's ineffectual government, one not trustworthy of coming up with credible solutions to the crisis or enacting the reform in a meaningful way. This month Greece will have its last chance to resolve serious calculation errors that it has made in the past.
