Friday, 24 August 2012

A week to know about Greek Bankruptcy

Greek Prime Minister Antonis Samaras has a planned visit to Germany next week, during which he will meet with Angela Merkel to discuss a two-year extension to his country's austerity measures. 

On one hand Samaras's plea makes sense: The austerity measures taken so far have paralyzed the country and made it go through one of the worst recessions in history. Next year is expected to be better for the Greeks as a recent IMF forecast expects GDP to be stable for the whole of 2013. (more on Greece's Progress here). It is more than reasonable to assume that both his popularity and his country's GDP will face a sharp drop if any more austerity measures are rapidly implemented. Even now, due to lack of money, Greece has to resolve to creative emergency loans in order to avoid default.

On the other hand Merkel's hard opposition makes sense as well: If the leader of one of the strongest economies in the EU accepts Samaras's terms then what would stop the Greek Prime Minister from asking for longer and longer time frames at the end of the two-year period? Let us not forget that the Greeks are to blame for their mishaps, although they may be suffering more than enough for them. €4 billion in savings from austerity measures are still missing, a prerequisite for the additional €31.5 billion the IMF and EU will disburse under the second bail-out package.

It seems like the two have reached an impasse: None of them is willing to fully accept what the other has to propose. The situation might look like a Gordian knot, however, like Alexander the Great (or Solomon if you prefer) I would suggest something simple: Compromise at a one-year extension of austerity measures, in order for the Greeks to have a smoother adjustment to them. In essence this would ease the consequences of hard austerity measures as their effect would be smoothed out over a year. 

Nevertheless, for the Germans and other Greek creditors to be sure that the reforms will take place, and their hard-earned money are safe, Samaras will have to formally present the reforms to be undertaken on a given date. On that date, (maybe in late 2012 or early 2013) the reforms would be presented to the public in a press conference, and the exact date of their implementation will then be set. 

In a compromise like the one described above, Greece's creditors would have an easy way of checking whether the Greeks have kept their word, while at the same time allowing the country to ease the pressure of rapid austerity measures. This would allow markets to believe that the odds of a Grexit scenario are declining. 

However, even if they disagree on everything, the Greeks should still receive the €31.5 billion package. Failure to do that would bring the EU down until the end of the year.

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