Constantin Gurdgiev is head of research with St. Columbanus IA and lecturer in finance at Trinity College, Dublin
So, the Greece Deal is done – at least mostly done – following riots and Parliamentary approval. What now?
First, Germany, the Netherlands and Finland - the only three still fully solvent economies of the euro area - will huff and puff through the next week or so, in the end approving the new deal. The final tally for this latest bailout, to be set by the euro group, will come in at €130-billion. Or, or it might come in at €145-billion to account for deterioration in the Greek economy from last July through December, 2011. It might even include few billion more to cover losses on continued recession, plus riots, since the New Year. Very close to the March deadline, Greece will receive the vital €14.5-billion in funds needed to repay its bondholders, thus averting or delaying the immediate threat of default.
The only big uncertain is the Finnish insistence on collateral for lending to Greece – the insistence on which can still ignite a race to seniority amongst other net lending countries contributing to the Bailout-2. But in the end, the Finns will be forced to accept a compromise.
Following the finalization of the deal, the Troika (the IMF will find it very difficult to resist the temptation to partake take EU money to finance lending to Greece as the new funds will only expand the IMF’s mandate) will promise to keep a hawkish eye on the dovish Greece. The bond yields across Europe will come down a bit more. ECB’s injection of some €600-billion worth of new money into the banks will help even further. Few European banks are in any position to lend into the real economy, so the LTRO-2 will go, once again, to prop up sovereign bonds prices.
The EU elites and national governments will proclaim that the rescue package was a sign of Europe’s ability to deal with the crisis, the evidence of viability of the euro and will move on to draft more daft high-sounding ineffective programs for the social-knowledge economy, driven by wind-powered nanotechnologies.
By mid-April, however, tired of ECB-sponsored margin arbitrage scheme, investors worldwide will take a look once again at the peripheral states’ fundamentals. By then, Q4 2011 – Q1 2012 recessions will be fully apparent. Rising unemployment and collapsing domestic economies will push deficits off targets and debt dynamics will show a renewed upward momentum, while political pressures on governments in Italy, Spain, Portugal and the perpetually ungoverned Belgium will become more pronounced. Spotting new shorting opportunities, the markets will be back at pressuring peripheral yields up.
Greece will remain the core driver of uncertainty and risks both in the short term and over the long run. Having satiated itself with the rescue funds for the moment, the Greek government will do what it does best – shirk from any substantive change. In April, a set of new reforms measures will be deployed, starting with tightening of some high profile (aka blatant) tax non-compliance. Woefully inadequate, these measures will be followed by deeper cuts percolating into the pay packets and employment numbers of public servants. Mild as these effects likely to be at the start, they will trigger new riots. A new block of disillusioned and recently expelled lawmakers will take a populist stand against the government.
Across the periphery, the extreme and populist leftist parties will gain prominence not because they represent a viable alternative to the status quo, but because after three years of continued crisis, no single mainstream party will be left unscarred by complicity with the EU/ECB/IMF policies.
By mid-May or early June, Greeks will post new data showing catastrophic contraction in growth, continued rises in unemployment and poor targets performance on the fiscal side. The crisis will be back. Greece will be hurtling toward elections.
The reality of the Greek situation is very simple, and extremely grave. The country will not deliver on the vast majority of its promises. Frankly speaking, it never did deliver anything real or sustainable in terms of growth and competitiveness in the past and it is not about to start doing this in the near future. The only uncertain part of this equation is just how long will it take the markets to realize that the Greek economic recovery arithmetic is simply bogus, computed not to reflect the reality of rising debt, falling tax revenues, collapsing economy and destabilized society, but to fit the Brussels-Frankfurt objective of pretending that debt to GDP ratio of 120 per cent is sustainable, lest admitting otherwise would trigger a run on Italy. My guess, about two-three months will do. Possibly six. Thereafter, the full-blown crisis will be back.