Market relief will be short lived over Greek debt

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Market expectations will soon again take a downturn

Yesterday June 30, the Greek Parliament passed the necessary legislation that puts the “medium-term programme” into force. In response to the news the markets reacted positively, as now a Greek default that would be catastrophic for the EU at this stage, has been prevented or better say postponed.

The markets were fearing – and were right to think so – that if Greece did not pass the “medium-term programme” which was a condition set by the troika (EU, IMF ECB), then things would reach a stalemate resulting in a Greek default within this month (July) or in early August.

This wind of optimism will be short-lived though, when the first signs of the implementation of the new austerity measures will prove that no progress is made. Furthermore, taking into account that the supply of money will become more expensive thanks to the increase in interest rates that was announced yesterday by the European Central Bank President, Jean-Claude Trichet, aiming to tackle inflation; it is certain that this will further worsen the chances of Greece to prevent a default, as now Greece needs cheaper money to deal with its liquidity problems and with its over-appreciated exports –  not the opposite.

Greece is in grave need for cheap money. The ideal would be to abandon the euro, at least temporarily, so as to depreciate its exports. But since Greece remains in the euro and since the single currency is going to become even more expensive, then the decreased liquidity will make economic recovery practically impossible. The markets will soon realize this. They will soon understand that a Greek default cannot be prevented.

As I have repeatedly stated before, Greece will not avoid default and in fact many experts argue that a default is inevitable in the medium-term.

After viewing the provisions of the medium-term programme and after evaluating their ramifications, together with the overall situation that exists in the EU, I still believe that Greece can not avoid defaulting on its debt, but I also uphold that is is better for Greece to default now rather than defaulting in the near-future, whereby the situation in the real economy will be much worse.

I am offering to you a part of one of my previous analyses that I wrote in May 23, regarding the above-mentioned belief, which is still current:

In the way things currently stand, I believe that it is better for Greece to default on its debt now rather than take new austerity measures, since I firmly uphold that either way default is inevitable. So it is better for the country to have it now rather than in one year (or some years), since the delay that will be achieved by the implementation of new measures will completely destroy the internal market as it will draw even more money out of the real economy.

The reason I say this is related to the way I see future recovery from the default. The real economy today will seem much better if compared to the economy that will come out of the new austerity measures. Thus it is only reasonable to conclude that recovery today will be relatively easier and faster than recovery in the future.

Today there still are some businesses standing and some sectors of the economy will be able to stand up, with the tourist sector being the most important, if Greece defaults now and readopts its national currency. Whereas if it stays under the memorandum at the expense of adopting stricter measures, it will eradicate those forces of the economy that are still alive, only to achieve a delay of the inevitable.

To recapitulate, if Greece defaults in the present, we will have a bankrupt state with a semi-bankrupt real economy, which is really bad but still not entirely catastrophic. Whereas if Greece takes new austerity measures and then defaults in the near future, we will end up with a bankrupt state and a completely broke economy which is by all means a far worse scenario.

So the way I see it there is no real dilemma here. It is only a matter of choosing the least worse scenario and a realistic approach is to declare default now rather than postpone it.

Having said all of the above I need to conclude saying that the bailouts to Greece do not aim to save the country from default. They are only aiming in minimizing the costs of such an event.

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Protesilaos Stavrou

EU policy analyst. Philosopher. Web developer.
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