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Greek debt - Stepping back from the edge?

2011-06-30 12:40:19

ALL eyes are on the Greek parliament, where a vote on a new package of austerity measures is imminent. Europeans and the IMF have made additional payouts of their already agreed Greek support plan dependent on adoption of further austerity measures, deemed necessary to get the struggling nation back on track to meet its deficit reduction goals. The Greeks, not without cause, are angry with the new demands on them. The contractionary impact of the cuts in place has dragged the economy deeper into recession, making progress on fiscal consolidation slow. Meanwhile, European leaders, and the European Central Bank especially, are reluctant to foist any of the pain of insolvency on creditors.

Given the apocalyptic language in the press ("suicide vote") and the visible anger in the Athens streets, one might assume that the worst is nigh. Markets, however, are behaving as though passage of the austerity measures is a foregone conclusion. European markets are up, the euro is strengthening, and yields on peripheral debt are backing away from recent crisis highs. Traders are anticipating a positive vote, securing aid payments to Greece and forestalling any immediate meltdown.

Yet virtually no one believes that the Greece's underlying difficulties, to say nothing of the periphery's as a whole, have been addressed. Greece will need a new aid deal eventually; it cannot hope to return to markets to borrow for some time. Negotiations over that package will lead to more recriminations, more demands on Greece, and more brinksmanship.

But for now, all eyes are on the Greek parliament, where the immediate crisis is likely, knock wood, to be defused...

UPDATE: The austerity measure passed. Europe's disaster remains a slow one, rather than a fast one.