The Greek election was for schnooks. That’s not where the real story is happening.
Sure, a win by the loony leftist Syriza party would have put Greece on the fast-track to the Euro exits. But Hellas, even with a New Democracy-Pasok coalition government, is still on the moving walkway that is likely taking it to the very same place. So instead of sooner rather than later, it’s probably [a bit] later rather than sooner.
Here’s what Citigroup is saying today:
Initial reactions from European officials welcome the outcome of the election, but made very clear that the there is little room for the new government to change the existing bailout programme. With this in mind, our probabilities for Grexit [Greek Exit] remain unchanged in the range between 50% and 75% over the next 12 to 18 months.
And Morgan Stanley in a new research note:
Not much is resolved from a medium-term perspective. … The list of prior actions that Greece needs to comply with is long and substantial. The IMF Memorandum of Understanding published on March 9, 2012, says that “prior to the first disbursement of the new programme, the Government adopts the following measures, through a supplementary budget.” These measures amount to about €3bn, or 1.5% of GDP. And “some 7% of GDP in additional measures will be needed to attain the 2014 fiscal target”. Even though the Troika might make some small concessions, there’s a high risk that the loan tranche is disbursed with some delay, given that we are running at least six weeks behind schedule for Greece’s ability to make all domestic payments.
Finally, Goldman Sachs with the exclamation point:
Greece will remain a source of uncertainty due to its macro-dynamics. The country is undergoing extreme economic pressures that are likely above and beyond austerity; prolonged uncertainty have led to a multi-year suppression in confidence and a collapse in credit growth, which has helped compressed the private sector, create supply shortages and has contributed to the lack of investment or privatization efforts, higher structural unemployment and persistent inflation currently observed. Unless this uncertainty of tail events is lifted over Greece, moderate solutions will be prone to marginalization, while extreme and populist views could become ever so prevalent.
And if New Democracy can’t form a government with Pasok, we’re right back where we started.
But Greece is a sideshow. It’s Spain and Italy on center stage. Despite the favorable election results in Greece, borrowing costs rose for both economies. The yield on Spanish 10-year bonds surged above the 7% red line, Italy above 6%. Markets may have finally moved beyond relief rallies based on nuggets of supposed good news. They want the Big Fix, and maybe it will come at the big EU meeting at month’s end. But that is not likely, is it? Everyone wants “more Europe,” but defines that goal differently. France wants a banking union leading eventually to a greater political union; the Germans just the opposite. More muddle from the politicians could put both Spain and Italy on an accelerated exit path.
Meanwhile, the other growth engines are sputtering—China, India, the United States. In the U.S., we’re now looking at a repeat of 2011, even if the EU crisis is contained. Slow growth, flat incomes, high unemployment. We’re not ready for another storm, much less a perfect one. But that’s just what might be on its way. And nothing that happened in Greece yesterday changes that. The only people who believe that are the schnooks—or someone trying to sell you something.
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