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New Greek Deal Forged … or Was It?

The markets and mainstream media thought that a new bailout deal had been made with Greece at last, and the investors reacted with some glee. That proved to be short-lived enthusiasm as the reality of the situation set in. The “troika” made up of the European Union, European Central Bank and the International Monetary Fund has not indicated pleasure with the plans put forward by the Greeks. They want to see more cuts and more commitment to an austerity plan that will extend past the April elections, and the Greeks have been very reluctant to make that kind of promise amid already weak growth prospects and widespread rioting from the populous over any more austerity.

The deal that the current government made has already caused some splits in the ruling coalition as the small, far-right LAOS party has refused to support the plan and have threatened to pull out of the coalition altogether. They do not have the ability to collapse the government, but they illustrate the threat that worries the “troika”. The government now may be supportive of the plan, but there will be plenty of opportunities to reject the plan in the near future future. If so, the rescuers will be right back where they started.

The fact is that Greece is not in a position to make the radical changes demanded thus far. It may make perfect fiscal sense, and the reforms may be long overdue, but that doesn’t change the situation in the streets. The demands will mean radical cuts in pay and benefit for the millions of state employees and they are represented by some of the most radical unions in Europe. They will not accept these changes without extreme protest as has become the case.

Though markets rallied on the news that a deal seemed imminent and, now, the enthusiasm has faded just as quickly. The fact is that one of these positions will have to be abandoned, and it is not at all clear which country has the most leverage. It would appear that Germany holds the cards as they are the only ones that can make the financial commitment. However, if Greece refuses to go along with the deal and allows the chips to fall where they may, the repercussions (a bank-crippling uncontrolled default) could be as bad for the Germans as for the Greece.

Source: Chris Kuehl, PhD, NACM economist