The real risk to Greece is Greece

Posted by Neil Hume on Jun 16 17:19. 37 comments | Share

An obvious point maybe, but one worth making, reckons JPMorgan’s David Mackie.He thinks we should move on from worrying about the dispute between Germany and the ECB on Greek Bailout II and instead focus on what’s happening in Athens. More…

An obvious point maybe, but one worth making, reckons JPMorgan’s David Mackie.

He thinks we should move on from worrying about the dispute between Germany and the ECB on Greek Bailout II and instead focus on what’s happening in Athens.

(Emphasis ours throughout.)

It has become increasingly evident that the real risk to the next package is coming from within Greece itself. The prime minister is losing support within his own party, and there is huge conflict across the political spectrum and the population as a whole. It is possible that the prime minister will not survive the coming few days. It is increasingly likely that a new government will be formed which will want to renegotiate the terms of the package with less fiscal austerity and fewer asset sales. This could come about either through the formation of a coalition of national unity, or as a consequence of the current government falling and new elections delivering an administration led by the current opposition.

It is far from clear how this would go down in the rest of the region and at the IMF. Much would depend on exactly what a new government would sign-up to, and on how financial markets were to behave during the negotiations (remember the US Congressional vote on TARP). Further official support could well be forthcoming, as long as the Greeks were willing to put in a reasonable effort and if financial turmoil looked likely to threaten the stability of the region. While it is possible to imagine a compromise which would keep the Greek deficit funded, it would certainly need to involve a significant maturity extension to limit the build-up of official liabilities.

If this situation were to unfold the alternative to compromise would be outright default, which would be a disaster for everyone, including the Greeks and the rest of the region. It would lead to a collapse in the Greek banking system and the economy, and would likely generate a significant financial crisis across the region. But with an increasing number of people in Greece itself thinking that default might be in their best interest, the risk of a major policy error in the coming weeks should not be ignored.

Quite.

Related links:
Going off the bailout script, Greek-Irish style – FT Alphaville

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