(by Eugene Murray)
As Greece agrees to more austerity cuts today, market analysts believe this is merely an exercise to prolong an ‘inevitable’ default.
The purpose of the Eurozone’s permanent €500bn bail-out fund was to use it pre-emptively to avoid full scale bail-outs, however in the case of Greece, Ireland and Portugal this has proven unsuccessful to the end that each have required extensive bail-out schedules. The overhaul that could have put the Eurozone on the front foot never happened.
And as the blame game continues to unfold across the EU, it is believed that this is time that could be better spent preparing for a default scenario.
Greece will not be able to pay back its debt. The EU will eventually get tired of extending the bonds and Greece will sooner or later have to pay market rates, whether this is two or three years down the line.
The recently passed austerity cuts will not solve the restructuring problem, it merely extends Greece’s payment schedule. This affords Greek Banks and those with a level of exposure to the Greek markets to better prepare their balance sheets; it is hoped that this vital preparation period will avoid a Lehman scenario.
A default scenario will be felt throughout the global markets, particularly within the Eurozone. Weaker economies such as Ireland and Portugal (and to a lesser extent Spain) are advised to stress test against a default scenario and prepare accordingly. Time will tell whether these weaker economies have been afforded enough time to find their feet before a Greece default hits.
The greatest concern for Greece is not whether or not it will default, (this is an almost certain scenario) it is whether a default would be enough to get Greece back on its feet. Greece’s lack of competiveness is concerning. This coupled with a likely default throws into question Greece’s creditworthiness making it extremely difficult for Greece to gain access to the Global Credit Markets.
Hind sight is wonderful thing; however one has to believe that warning bells surrounding Greece went off much earlier than now.
