Greek Drama: Parliament Passes Austerity Plan
The votes are counted and Greece is on its way to receiving its €12 billion ($17 billion) quarterly loan installment from the IMF/EU and avoiding a default. Parliament voted 155-138 to approve a five-year austerity plan, which includes €28 billion ($40 billion) in future spending and wage cuts, tax increases and privatization of €50 billion ($71 billion) in state assets. A second vote on the implementation of the law is due tomorrow.
Before you think: "The Acropolis, brought to you by Coca-Cola!", the state assets up for grabs in the Greek Tag Sale include more mundane properties, like: a casino, the state lottery and sports book, a golf course, a couple of airports and the Greek railway and some state-owned utilities, to name a bunch.
The vote comes amid a two-day strike, that turned violent at times. It was odd to watch the protests escalate at the same time that stock futures were rising. It was a perverse twist--the investor perception was that if the Greek population believed the big cuts are coming, then the package would probably pass and that would temporarily bring down the heat in Europe.
The emphasis on temporary is important. The past few weeks of Greek drama has surrounded one quarterly payment of the original €110 billion ($156 billion) IMF/EU loan package. That money was supposed to tide over Greece until mid-2013, but in a country where the government can't collect 1/3 of its revenue, youth unemployment is running at nearly 40 percent and debt is running at more than 150 percent of GDP, earlier projections didn't exactly work out as planned. Without this next slice of bailout funds, Greece was on course to run out of money in weeks.
With Greece out of short-term danger, a number of longer-term questions arise:
- How much more money does Greece need and who's going to lend it? Probably another €100 billion, to be packaged by the EU and IMF
- What about the banks that have already loaned Greece lots of money? Banks and insurance companies, especially European-based ones, have extended hundreds of billions of dollars of loans to Greece. Those institutions would suffer big losses if the country were unable to repay its debt. If you think US banks were/are in bad shape, Europe makes our institutions look rock-solid. So, the EU and the IMF are working hard to engineer a plan where the banks would not lose too much money (a point that is not lost on Greek protesters) but would continue to extend funding to the beleaguered country.
- Why should we care about a small country in Southern Europe? If the above-mentioned banks get slammed with losses, it would destabilize the financial system in Europe and across the globe. Also, if Greece were to default, the contagion could spread to other weak European economies like Portugal, Ireland and Spain (remember those PIGS?) Essentially, the Greek Drama is not really about Greece as much as it is about the wider system. Think back to 2008--the failure of Lehman Brothers was bank-specific, but it had a cascading and frightening effect across the global financial system.
- Is the comparison of Greece's debt woes to those of the US valid? Greece is in far worse shape than the US. Remember that Greece debt is more than 150 percent of GDP, while the US debt is about 95 percent of GDP. Nobody is happy as that number, but the US has far more options and is in a much stronger position to deal with its debt than Greece. That said, the Greek debt drama is certainly instructive--countries must deal with their fiscal problems before the market forces them to do so.
