Tuesday, November 6, 2012

Crucial vote in Greece this week too

The US isn’t the only country facing a crucial vote this week.  On Wednesday the Greek Parliament votes on the latest round of austerity measures thrashed out with the “troika” of the European Commission, the International Monetary Fund and the European Central Bank.  That vote will be followed by a further vote on the 2013 Budget at the weekend which will come just a day before the next Euro-group meeting of Finance Ministers in Brussels that should, assuming everything goes smoothly in the Greek Parliament, unlock the next tranche of bailout funds.

It appears that one member of the governing coalition, the Democratic Left, does not support the package.  They have been arguing for more concessions on labour reform.  Even without their votes, the package is still likely to be approved.  Prime Minister Samaras’ New Democracy Party and Pasok together control 160 seats in the 300-seat parliament.  That’s comfortable assuming members vote on Party lines.

The austerity package includes a number of fiscal and structural reforms that should save 13.5 billion.  However, the Budget will also show the debt-to-GDP ratio heading over 190% of GDP by 2014, rather than the peak of 167% envisaged  at the time of the March bailout agreement.  That’s a function of a deeper recession (the lost balance between growth and austerity coming home to roost) and delays to the fiscal consolidation plan caused by the inconclusive May election.

The stakes are therefore higher than just receiving the next tranche of the bailout.  Agreement on the latest austerity plan is also likely to bring revised bailout terms to provide an extra 13-18 billion in financing.    This could include a number of options such as lowering the interest rate on bailout loans.

The debt burden remains too high and it appears less and less likely that Greece will meet its debt to GDP target of 120% in 2020.  However, we continue to believe it’s best for all concerned if Greece and the rest Europe sort this out together.