Europe fails Greece

Tell Greeks that there is no such thing as bad publicity and they will most likely disagree. A country contributing only 2% of Europe’s GDP is receiving a disproportionately large share of global media financial coverage and unfortunately for all the wrong reasons. Revelations of (i) an unfit public sector operating with historically generous civil servant remuneration packages (ii) a high propensity to avoid the taxman and  (iii) fiscal overspending- all led to disgraceful deficit levels even before the crisis hit the world economy- much of the scrutiny facing Greece is deserved, but not all of it.

The holy Troika, was established as Greece’s messiah – and austerity coupled with fiscal reform was deemed the path to redemption with an outlined vision of 120%  debt-to-GDP by 2020. A lot of people criticise Greece for not imposing enough austerity with EU ministers openly voicing their concerns that to little has been done- However, since 2009 Greece has shrunk their primary fiscal deficit from 10.6% of GDP to just 2.4% in 2011, make no mistake of it-these are impressive results and have been hard felt on the Greek people, particularly as the nation is submerged in a recession.

But austerity is not enough. The cost of financing their existing debt as well as the required inflow of foreign reserves needed to balance their current account deficit (4.6% in 2011) will continue to exert challenges on the wider government deficit (9.6% in 2011).

It seems that the Troika  prescribed the Greeks with the wrong medication and now the Euro zone’s willingness to save Greece has been diluted. With fogs surrounding the second €130 bn bail-out and the €100 bn write off of owned debt it becomes natural to question why the Eurozone have changed their standpoint?

Market participants are aware that Greece will not be able to honour the much feared March 20^th bond payment of €14.5 bn without the passing of second bail-out package. It appears that a disorderly default is now more likely than ever before, yet the fear of contagion has fallen. Investors no longer think that a Greece exit would cause the collapse of the Euro and so Europe's willingness to assist is questionable. It seems that an abrupt disorderly default carries sever contagion risk and Greece benefited from this fear- However a dragged out default reduces the contagion risk and with every day that passes the wider consequences of an orderly Greek default are diminishing.

My opinion is that Europe will survive and Greece might be the ultimate sacrifice – the ultimate illustration that fiscal mismanagement has consequences. Europe might end up stronger afterwards, but the Greeks will pay the ultimate price. It seems that the Troika commanded Greece to a slow and inevitable death while the rest of the world could come to terms with the shock of an European Sovereign defaulting.