Greece is set to have a new government, which will hopefully enjoy broader political support and the approval of the country?s official creditors. The markets may rejoice at first if the new government is made up of politicians and technocrats with a successful track record and experience, but this does not mean the road ahead is paved with rose petals. The country?s winter of discontent will be long, testing the stamina of the political system as more signs of a more severe than anticipated credit crunch become visible.
It is true that Greek politicians, barring a few exceptions, are not admired for their insight, know-how, management skills and boldness in tackling cumbersome problems. Their stance during the ongoing economic and public debt crisis is proof of this.
With that in mind, the new government will have to be made up of the most credible politicians along with some technocrats, such as Lucas Papademos, former vice president of the European Central Bank, serving in the main post of prime minister or finance minister if it is to make a difference. This is crucial since its tenure will likely be short and will have a mandate to lead the country to early elections.
Greek history is not on the side of the optimists since past coalition governments in this country have exhibited all the disadvantages of having ministers from various parties with different political agendas without the benefit of taking decisions that would be painful in the short term but beneficial in the long run.
Hopefully, this time will be different, but we suspect their differences will emerge when they start talks with the troika of international lenders – the European Union, International Monetary Fund and European Central Bank – on Greece?s new economic adjustment program to accompany the new loans of 130 billion euros as well as the new private sector involvement (PSI).
Remember that Greece was to receive 110 billion euros via bilateral loans from eurozone countries and the IMF in the first bailout package. If it gets the sixth tranche of 8 billion euros from the EU and the IMF, Athens will have received about 73 billion euros, of which 52.7 billion will have come from the country?s eurozone partners.
If one puts together the 110 billion euros from the first bailout package and the 130 billion promised under the second, the total of 240 billion euros exceeds the country?s gross domestic product, estimated at around 220 billion euros at the end of 2011. In other words, the total official loans will exceed 100 percent of Greece?s GDP. Of course, a good deal of this money returns to the banks, insurance companies and other entities of the country?s official creditors.
It is noteworthy that even before the second rescue package was in place, financier George Soros had pointed out to one of his Greek acquaintances that the official loans to Greece exceeded all official loans and aid provided to Africa.
In reality, the total amount is much bigger if one includes the ECB?s financing of Greek banks with more than 100 billion euros since it accepts government bonds and guarantees as collateral.
However, this huge amount in loans has failed to produce the desirable effect on the Greek economy, which has plunged into a deep protracted recession on the heels of austerity measures no other developed country has seen so far.
Unfortunately, there is no reason for anybody to believe that the economic contraction will end at some point in the foreseeable future for a number of reasons, including a deterioration in the global economy, and that of the eurozone in particular, which entails less revenues for Greece from tourism, shipping and exports.
Moreover, there are no encouraging signs on the investment front since many – foreigners and Greeks alike – are concerned about the country?s future in the eurozone and the slump in the economy.
However, the biggest threat to the local economy is from the fast-growing credit crunch, which is threatening to engulf major companies and even entire sectors.
We have long argued that it is in the country?s best interest to have the banks mark down their bonds and cleanse their loan portfolios as soon as possible and recapitalize them afterward if they cannot raise the necessary funds from private sources.
This process is likely to take place in the next few months, but there should be no illusion of what to expect next even if banks are recapitalized as far as providing credit to the private sector.
This is so because it is unlikely that liquidity at local banks will improve quickly thereafter. It is unlikely foreign banks will start lending to them on the interbank market while wholesale markets will not open to them following the country?s selective default on bonds worth 206 billion euros. Even worse, there is no reason for bank deposits to start growing with the economy in recession and many people fearful of their savings if repatriated or redeposited at local credit institutions. In addition, it is hard to see the ECB consenting to provide local banks with more liquidity, accepting assets of lesser quality like the Greek central bank does.
However, even if banks are recapitalized, it will take time before the credit starts flowing again in the private sector, meaning the chances of a more protracted recession increase.
So, Greece?s EU partners, the markets and others may rejoice at the news of political consensus and the formation of a coalition government. However, tough economic reality on the back of a developing credit crunch will make it harder for the new government to deliver what the optimists are hoping for and weather Greece?s winter of discontent.