Greece’s embattled socialist government may have done just enough to keep multi-billion euro loan funds trickling into its cash-strapped coffers. The question, though, is for how long.
A new property levy announced over the weekend, plus a 7 per cent pay-cut for elected officials -- including the president’s paycheck -- will make up for about $3-billion in revenue shortfalls expected this year alone. What’s more, the emergency measures will most likely convince Greece’s international creditors to release $11-billion in loan aid to Athens by the end of September to keep this debt-crippled country afloat.
But then what?
Greece’s debt woes will hardly be over. In fact, European officials, who long shunned talk of a Greek default or exit from the single currency zone, are now seriously considering such scenarios. And as serious concerns persist over the indebtedness of bigger European economies, like Italy and Spain, some officials in Germany are now also starting to talk about redesigning the euro zone altogether.
“An orderly bankruptcy of Greece,” said Economy Minister Philipp Roesler, who leads the junior coalition party in Chancellor Angela Merkel’s centre-right government, could be in order. There should “no longer be any taboos,” he said earlier this week, about stabilizing the euro.
True. Taboos were already broken in July when Greece’s European peers agreed to make it easier for Athens to pay down its debt by patching together a new rescue plan that allows private bondholders, such as banks and mutual funds, to voluntarily swap Greek bonds with new, lower yielding paper. The complex scheme, due to be begin in the coming weeks, may create a credit event, say financial analysts, pushing Greece into default for a brief period, or until the bond swap is completed.
If Athens fails to muster enough interest by current bondholders, then a messy default would almost surely ensue, analysts say. Earlier this week, stocks sank and European banks were rattled as Greece’s default risk jumped to 98 per cent and analysts warned Greek bondholders that they could be facing a 50 per cent hit in losses.
With German banks full of Greek paper, it's no wonder Berlin has begun preparing for the inevitable. The bigger question is whether Athens is doing the same.