28th June 2011

F&C: Greece passes vote for austerity package

As expected, the Greek Parliament voted in favour the austerity measures that are a necessary condition for receiving the next tranche of aid from its original bail-out from last May. The size of the majority was larger than expected with the count cast at 155 for and 138 against. However, despite pressure to vote for the package there was still a significant minority that voted against, backed by increasingly large and hostile demonstrations outside the parliamentary buildings.

The vote should allow the troika (IMF, EU and ECB) to agree a second bail-out that is rumoured to be in the region of €120bn. This together with the original bail-out will enable Greece to fund its debt until 2014 and should prevent a default, in the short term at least, which has been threatening to disrupt financial markets during the last few weeks. There is a further vote on Thursday to change the law to allow the austerity measures to be implemented but with the first vote having been passed the second should also be successful.

While this is positive news for the Eurozone, because it avoids something much worse, it does not mean that Greece or any of the other periphery countries will be saved from possible default restructuring further down the road. Indeed, as it has done in the past, the troika has only kicked the can along the same road and, each time it provides a bail-out, it becomes more difficult to convince markets and the country concerned that it is the correct strategy. What the authorities are doing is adding more debt to existing debt and, combined with the strict austerity measures, has led to slowing economies and even higher public debt to GDP ratios.

The strategy of addressing short term liquidity needs, instead of solvency, is not sustainable and ultimately doomed to failure. While today’s news is welcome it will only bring glad tidings if the troika recognise that it is vital to change strategy and introduce the fundamental reforms that are necessary to help the periphery countries’ solvency position that has only got worse since the crisis began almost 18 months ago.

Ted Scott

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