Is Greece really the first car in the impending train wreck? Fisher Capital Management reports on world headlines and insights on the Europe’s debt crisis story.
What’s next?
As of December 2010, Greece has foreign debts amounting to $587 billion – $280 billion from foreign governments and $290 billion from foreign banks. The country’s problem appears to come from the insolvency of the government and the domestic banks. Despite already receiving financial aid from the international community, there is the danger that they might be denied any further bailout from the European Union (EU) and International Monetary Fund (IMF) should the austerity bill fail to pass.
Why are they scrambling to bail out the floundering economy of Greece? This coming July, Greece is in the verge of defaulting, that is, they won’t be able to make the scheduled loan payment. If that happens, a new worldwide financial crisis will be seen in the horizon. Worse, as experts fear, there will be an implosion once investors started pulling out their assets from Greece where the country will have no choice but to liquidate theirs in order to survive.
Futuregrowth chief investment officer Andrew Canter said, “…everyone knows Greece won’t be allowed to default, just like we know that the US will eventually raise the debt limit.”
The Eurozone in particular is quick to jump in Greece’s aid as their members would bear the immediate effects of such a breakdown and prompt a domino effect in even more markets. However, the capacity of the 17-nation Eurozone to provide stability is only limited and they are demanding additional austerity measures to be implemented by the state.
“Greece is like a car crash in slow motion,” says Canter. “We’ve all seen Greece coming for so long that it’s hard to believe that we’re going to let the car hit the tree.”
Thus, the austerity bills.
The ‘Band-Aid’ Solution
This Wednesday, after much opposition and debate over the matter of implementing deficit-cutting measures, the Parliament voted 155-138 in favor of the austerity bill. Basically, Greece is being forced to enact the austerity package or EU/IMF might not release the bailout due on July.
With the passing of this first bill, the world market reacted positively and stocks rallied, with talks of succeeding bailouts on the way.
This much-talked about austerity bill that Prime Minister George Papandreou has been determinedly pushing is a 5-year plan that aims to cut public spending as much as $20 billion and raise another $20 billion through increased taxes. This means Greeks will soon see a spike in VAT, prices of alcohol, fuel and tobacco, as well as levies on companies and households.
“Today, I am more determined than ever,” Papandreou said. “Now is the time to tackle everything that is wrong, with everything that hurts us, that holds us back.”
A global financial crisis is farther down the road, however, if Greece failed to contain the damage their economy is accumulating. But for now, there is little for other markets to fear as investors have received a warning of Greece’s worsening condition beforehand.
The Street Riots
As deputies voted inside the parliament building, there’s a different drama unfolding on the streets — civilians battling the police forces despite the barrage of tear gas. Violence across the square just outside the parliament building continued even after the voting was finished and concluded with 29 being detained and 9 arrested.
Fisher Capital Management said, “Basically, part of the austerity measures call for the government to sell off state assets and ventures along with cut back on payrolls. For the common people, this translates to unemployment, reduced pension and decreased public services like healthcare.”
If anything, the civil unrest in Athens is not at all surprising. After all, the effects of such an unpopular bill would bear down on them heavily. Unions firmly opposed privatizations and would not have any of the austerity measures.
What’s next?
The final voting on Thursday, where the implementation of the bill will be decided still leaves many in doubt. If all things went as planned, the world could finally heave a sigh of relief – albeit a temporary one – as Greece will receive 12 billion euros early on July to pay part of their debts.
Otherwise, we’re given the hint that the bill will just be redrafted and will be pushed through anyway – there is no Plan B.
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