Thursday, June 30, 2011

Greek vote does not end crisis, Portugal and Spain are still in precarious positions....

Greek vote does not end crisis, Portugal and Spain are still in precarious positions....

The Greek parliament's vote in principle to support a five-year austerity plan does not end the crisis - not by a long shot.

Prime Minister George Papandreou's government on Wednesday won a first vote by 155 to 138 votes. The second and final bill covering 28 billion euros (US$40.6 billion) in tax increases, spending goals and privatization of state assets, agreed as part of a bailout by the European Union and International Monetary Fund, is expected to pass on Thursday when parliament votes on article-by-article budget provisions. Watch out that the spending cuts actually approved may not be as large as the plan requires and the budget savings are not enough.

The plan also includes a rather ambitious privatization program that is unlikely to be fulfilled. The Greek government is having trouble moving the assets it needs to move, fast enough, and at

the right prices. This is a significant chunk of cash that will not become available to pay bills.

"There are still a lot of unanswered questions about the effective implementation of austerity measures, given the backdrop of increasing public anger in Greece," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, was quoted by Reuters as saying. Greek police clashed with protesters outside parliament early on Thursday local time ahead of the vote, the Reuters report said.

Also, the budget savings likely will fall short of their goals, because the spending cuts will result in slower growth and less tax revenues than expected.

Slower growth and deflation will cause private debtors to default in greater numbers on home, car and credit card loans - those will create new woes and spending by Athens.

Even if other elements of the austerity fall into place, Athens will soon be short of cash again - perhaps next year, or the year after. Then what does it do?

The voluntary private debt rollover remains sketchy. Even if debt rollover deals materialize without a hitch, the amount of forgiveness will prove inadequate, also increasing the likelihood that Athens will run out of cash again.

The debt rollover may well trigger a default call by bond rating agencies, and swap contracts could yet trigger huge payouts. United States banks have written a lot of those contracts. This could be Lehman Brothers all over again, if bond investors then flee Portuguese and Spanish debt enough to force their governments into financing crises. A credit squeeze triggered by Lehman's 2008 led governments in the United States and Europe to bail out financial institutions.

German financial companies late on Wednesday neared an agreement to roll over their Greek debt holdings, and Deutsche Bank chief executive officer Josef Ackermann predicted banks would contribute to help avert a "meltdown", Bloomberg reported. German and French lenders are the biggest foreign holders of Greek debt and their participation is key to the European Union goal of getting banks to roll over at least 30 billion euros of bonds, the report said.

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