News Analysis

Wednesday 1 October 2014

Megan Greene: Athens will take long road to an eventual euro exit

A disorderly default is likely to be avoided but Spain still faces major hurdles and Ireland needs a second bailout, says Megan Greene

Megan Greene

Published 17/06/2012 | 05:00

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The Greek political situation raises the risk of the country undergoing a disorderly default and exit from the eurozone, but ultimately I think this will be avoided -- for now.

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We can expect a Greek government, led by either New Democracy (ND) or the anti-austerity Syriza, to attempt to renegotiate the terms of its bailout programme.

There will be dangerous brinkmanship by both the new Greek government and the troika, and there is always a risk that one side will make a mistake and Greece will default and exit the eurozone by accident.

But it is in the best interests of both sides to find a compromise on the bailout, so I expect them to strike a deal. Regardless of who wins the election and what deal is struck on the bailout, the new government will be highly unstable.

We have entered a period in Greece characterised by elections, further austerity measures, social unrest and new elections. Eventually, the Greek electorate will put in place a government that is willing to consider a eurozone exit as an alternative to the current path of retrenchment and depression.

The banking bailout for Spain produced a market rally that was over before lunchtime the first business day after its announcement. As in Ireland, uncertainty over the banking sector has been corrosive for investor confidence in Spain, but the banks are only one piece of the puzzle in the Spanish crisis.

In addition to a banking crisis, there is a fiscal crisis and a balance of payments crisis in Spain. The banking bailout does nothing to address the latter two -- for that the Spanish sovereign will need a bailout too, either later this year or in early 2013.

Many analysts have argued that Spain got a better deal with its bank bailout -- which came only with conditionality for the financial industry -- than Ireland received in November 2010 when it was pushed into a full EU/IMF bailout programme. This is not the case. Spain is under the excessive deficit procedure, which means that it must hit budget deficit targets agreed with the European Commission that demand a swingeing fiscal adjustment.

Furthermore, the European Commission and the markets alike have forced Spain to pursue a structural reform programme. Spain will not remain outside of a full bailout for the sovereign for very long, and that bailout will have conditionality attached to it.

Ireland's best option in the very short term is to continue to pursue a restructuring of its promissory notes. Next year, as Ireland has to return to the markets to raise funding, the Government should also begin to negotiate a second bailout package with the troika.

Megan Greene is the director of European economics at Roubini Global Economics. You can find her analysis on www.economistmeg.com and follow her on twitter, @economistmeg.

Sunday Independent

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