Market Worries Greek Rescue Deal Could Collapse

The $145 billion (110 billion euros) rescue deal brokered by the EU members states and the International Monetary Fund, has done little to comfort jittery markets. While Greece should have the cash in time to meet its next round of debt payments due on May 19th, concerns over the future of Greece and the entire Eurozone pushed the euro to a year-long low of $1.30 Tuesday morning.

Trepidation for Greece’s long-term viability was highlighted earlier this week in a television interview featuring former Bank of England Policy Committee member Charles Goodhart.

“If this financing deal should collapse, and it might for one reason or another, then there would be a question of what the Greeks could possibly do,” Goodhart noted. “Default would be totally disastrous for them, and leaving the euro would be equally disastrous.”

Goodhart bases his evaluation on his belief that while the rescue package should be sufficient to keep Greece solvent for the next two years, it does not address the primary issues that forced Greece to the edge of the cliff in the first place.

“The problem is that it [the bailout plan] doesn’t meet their adjustment problems,” he said. “It doesn’t deal with the problem the Greeks [face], in part from having too large a deficit and too large a debt ratio.”

To deal with Greece’s deficit, the bail-out money comes with some major strings. These strings take the form of a forced “austerity” program requiring Greece to cut its deficit by the equivalent of 13 percent of its Gross Domestic Product. In a country where a large percentage of the population receive government pensions, and workers are used to bonuses for everything from holidays to simply showing up for work on time, this forced responsibility is not going over well with the public. Worker protests have increased in intensity with some labor leaders calling for more drastic actions, and there is a genuine fear of violence as demonstrations become more confrontational.

For his part, Goodhart is quick to point out that while Greece does indeed have a spending problem, he also points out that the Greek economy is “very uncompetitive and if they actually cut back the deficit as fast as is being required, they’re just going to go into appalling deflation.”

All of this leaves many observers with a growing uneasiness for the future of Greece as part of the Eurozone. Investors, as they usually do, allow their actions to express their beliefs and this is most evident in the bond market. The yield on Greek 10-year bonds has increased steadily to attract investors, and now stands at 8.7 percent. This is a spread of 566 basis points over the benchmark German bunds.

In some respects however, this is a bit of good news. Last week, before the announcement that an agreement to provide financial aid had been released, the point spread stood at 800 points. Still, you would think that $145 billion could have bought a little more confidence for the future of the troubled nation.

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