Greece continued to dominate headlines amid a looming debt repayment deadline.
European and IMF officials on Thursday hammered out a deal to provide Greece needed funding to repay bondholders in June and delay real decision-making until July.
But European politicians have every incentive to kick the can down the road and will likely continue to do so until their feet are to the fire— or until they are fired.
Greece dominated headlines for most of the week (again) amid renewed concerns of a potential debt default, political wrangling on a fresh aid package and rioting in Athens over proposed austerity measures. As the last year (plus) illustrates nearly perfectly, Greece’s woes are unlikely to be resolved overnight. However, fears of a Greek debt default and knock-on effects throughout the global banking system are likely overstated. Ultimately, European officials already have the tools in place to help mitigate Greece’s impact and buy additional time—but given the number of parties involved and the political implications of a bailout, a resolution on the terms of such a bailout will likely go right down to the wire.
The current chapter of Greece’s debt woes is predicated on looming bond redemptions in July, which the Greeks cover primarily with bailout funds. Now the problem: The IMF (a key partner in Greece’s 2010 €110 billion bailout) had previously restricted itself from providing funds to countries that did not have a “credible” 12-month budget plan in place. With Athens running a €10.28 billion deficit in 2011 to date (versus a €9.07 billion targetset as a condition of its 2010 bailout), the credibility of its plan is, rightly, in question. Thus, a new budget and further austerity were necessary.
So EU politicians face a dilemma: Knowing further austerity is needed and seeing the political upheaval in Athens, how to get the IMF on board to help meet this approaching cash need? Thursday, EU officials answered at least that part of Greece’s many questions, brokering a deal with the IMF to afford Greece more time. The EU will front Greece €8.7 billion, and the IMF will provide €3.3 billion by June’s end. Does this fix Greece’s issues once and for all? No. But securing this deal does take the stressor of immediacy out of the situation and affords Greece additional time to pass new austerity measures amid much political infighting—including a potential confidence vote for Prime Minster Papandreou. One thing seems certain: The next few weeks will involve considerable and probably vehement debate within Greece and at the EU level as details on the bailout continue to be hammered out.
Despite the new deadline for a bailout agreement, many continue to worry about potential knock-on effects of contagion across the European and US financial sectors—maybe not unlike the credit crisis of 2008. But that comparison seems quite overstated. US banks’ direct exposure to Greek default is minimal, especially considering the size of total US bank assets. Certainly, EU banks have more exposure to Greek debt. But as Thursday proved, European officials are fully capable of continuing to buy more time, which isn’t a terrible thing for markets as a gradual resolution to Greece’s woes is, in many ways, preferable to a sudden and disorderly one.
Clearly, EU leaders—especially Greece’s leaders (whoever they end up being)—face some difficult decisions ahead. But if there’s one thing EU leaders have clearly and forcefully displayed recently, it’s the power and willingness to kick the Greek can down the road.