Sunday, June 17, 2012

The Greek Elections: Kicking The Can Down The Road

Well, the Greeks have voted and the result is essentially indecisive.

The New Democracy Party,which favors staying in the euro and adhering to the bailout's austerity measure eked out a narrow win, but by no means enough to form a government.They appear to have won 127 Seats, with the left wing Syriza,party,which favored going back to the drachma and using the bailout agreement for toilet paper getting 72 seats. The PASOK Party, which is somewhat close in ideology with New Democracy got something like 32 seats.

A New Democracy-PASOK coalition would be enough to govern...but it appears to be 'complicated'.

First,PASOK's leadership refused to join the government unless Syriza was part of it as a unity coalition. Later, they seem to signal that they might join, but without any ministerial portfolios.

Here's what's behind it.

Greece's economy is in dire condition and on the verge of collapse. During the past three years, Greece’s GDP contracted by 16% and is expected to shrink another 7% this year. Unemployment has risen to 22%.

As a result of the dire condition of the economy, Greece’s public finances and outstanding public debt are much worse shape than the IMF projections earlier this year, tax receipts are declining and the Greek government faces major payment arrears on money that needs to be spent simply to keep the government going.

The IMF will almost certainly demand further cuts in public spending as a condition of making its next loan disbursement which is politically unsustainable..there's absolutely no way parliament will approve them.

The markets may initially react favorably as they did with Spain, but reality is going to set in shortly.

Greece will likely default on its debts and be out of the euro before 2012 ends. The economy is simply too bad, the debts too high . And there are simply no further cuts the Greek public will accept and no further concessions the IMF and the eurozone are going to be able to offer, especially since Spain and Italy are going to need to be dealt with.

The EU is likely headed for a deeper recession, and it remains to be seen what the effect on America and other world markets will be.

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