In the month of March, there was a lifeline for economy of the Greece when countries like Germany, Finland and others agreed to make a €130 billion bailout for the country. But now when the results of the election have come up on 6th May and both the coalition parties unable to garner a majority and having a hung parliament, there are talks going on for bailout re-negotiation. Greece's euro-zone partners agreed to release only €4.2 billion ($5.5 billion) in previously agreed financing, to be paid out Thursday, holding back €1 billion at least until June. That would be paid only if Greece keeps to pledges it made to secure a bailout.
With talks reaching no resolution Wednesday, the Pasok party, which came in third in Sunday's vote, will make a last stab at building a coalition. But few expect a breakthrough and many observers say parties are positioning themselves for another election in June. "It doesn't look like there is any other solution apart from elections," one Syriza official said.
The next round is shaping up to be a showdown between Mr. Tsipras and New Democracy leader Antonis Samaras, who is expected to make the election a last stand for Greece staying in the euro bloc.
With Athens in political turmoil after a fractured result in weekend elections, and a new vote likely by June, German politicians cautioned that further aid could be withdrawn if Greece abandons austerity targets—even if that pushes the country from the bloc.
The election results have clearly showed that the public there is against austerity drives which are one of the necessary conditions for the bailout package to be given out by the EU. Thus it would be very difficult for any government to approve further cuts of €11.5 billion by June end. Thus the country is imminent to head for an economic emergency again. Technically such comments lead to only one thing- the imminent fall out of the Greece from the European Union. Such fears continue to keep European financial markets on the edge.
Implications of Greece’s exit:
Even before an exit Greece’s banks could collapse if the steady withdrawal of deposits—they are 30% below their peak, according to Credit Suisse—were to develop into an outright run. After an exit debts to foreign creditors would soar as the new drachma fell, leading to further defaults. On strict legal grounds, Greece could find itself cast out of the European Union as well as the euro area, at risk of losing access to the single market.
But the panic would not be confined to Greece (which made up just 2.3% of the euro zone by GDP in 2011). Depositors in other vulnerable economies could take fright and try to withdraw their funds from their banking systems. Even if the European Central Bank (ECB) fought this with massive liquidity support, the crisis would shake already frail banks, especially in Spain. Bond yields will jump in any country that might conceivably leave the euro once such an exit has actually happened, with the rise proportional to the risk. Bad, then, for Spain and Italy. Worse for Ireland and Portugal, which have already needed bail-outs. Last year elections in both countries produced reform-minded governments, but the economic pain they are already undergoing is intense. A referendum on the German-inspired “fiscal compact”, which will insert public-debt brakes into national laws, is due in Ireland on May 31st and many Irish may be tempted to use the occasion to vent their discontent and add to the anti-austerity movement in Europe. An Irish rejection would not prevent the treaty coming into effect, but it would relieve the Irish of any obligations under it, and mean that they would not be bailed out in future. Thus a Greek exit from the euro zone would not just be chaotic for Greece itself but would also invite questions about the status of Portugal, Ireland and others.
The Greek Government bond yields were relatively unchanged with the 10-year quoted at the price of 20-22 cents on the euro, to give a yield in the region of 22%-23% . While the Spanish and Italian bond yields continued to grow higher with Spanish bonds up nearly 0.12 percentage point at 5.915% and Italian higher 0.07 points at 5.68% according to data from Trade web.
Thus the need now is for the policymakers to look for other strategies like a credible commitment to mutualize the debts of remaining euro-zone countries, because as stated by the new French president-elect Mr. Francois Hollande that austerity is not a panacea for the problems. But it is hard to see how such a pledge could be made credible enough in the near future. There is no consensus among Europe’s elites that this is the way to go; and the political journey to that destination would rightly require parliamentary votes and referendums.
Article By:
Prathmesh Limaye
SIMSREE
Article By:
Prathmesh Limaye
SIMSREE
