It seems as if this has happened before. Unwilling to let Greece’s troubles bring harm to the Eurozone, earlier today EU leaders and the IMF put their support, and money, behind Greece. EU member governments along with the IMF pledged a total of US $145 billion of aid; these funds come in the way of US $80 billion of bilateral loans from EU governments, as well as three-year SDR (special drawing rights) of approximately US $40 billion from the IMF (this represents a 3200% increase over Greece’s current SDR).
The deal aims to convince the markets that the EU, and Germany especially, is 100% behind supporting Greece. By proxy, it also is intended to send the markets a signal as to how cohesive the EU will be when dealing with the looming debt crises in Portugal and Spain.
Putting Greece back on the path of economic sustainability the IMF/EU bailout imposes stringent austerity measures upon Greece. A number of measures are being undertaken to address Greece’s current 13.6% of GDP deficit. Much to the ire of Greece’s civil servants,pensions and wages are being frozen,and seasonal Christmas and Easter bonuses are being done away with. Also, increases in excise taxes for a variety of products, as well as an increased Value Added Tax (VAT), will help bolster government revenues. Additionally, military spending will undergo a “significant reduction.” The new projections released by the Greek government depict a scenario where, with these measures, the deficit is brought to 8.1% of GDP by the end of the year, and gradually reduced to 2.6% of GDP by 2014.
Greek Prime Minister George Papandreou addressed the Greek Cabinet taking a strong stance against bankruptcy. Calling bankruptcy a “red line for the Nation,” Papandreou aimed to assuage fears among government officials, and international investors, ensuring that he will “do whatever it takes for the country to not go bankrupt.” Having only come to power in October 2009 in a landslide election against the ruling New Democracy Party, Papandreou offered choice words for the previous government: “[nobody could ever] have imagined the size of the debt and the deficit which the former government hid . . . This is not the time for accusations however.”
Skepticism abounds over what many see as just another deal which will delay Greece’s inevitable bankruptcy. Zero Hedge, albeit generally possessing a pessimistic viewpoint on things, commented that “we don’t believe anything new has happened or anything has been resovled (sic).” The Euro took a beating on the resumption of Forex trading, dropping approximately a penny against the Dollar. After a jittery week, Gold continues to cling to its recent highs, and remains only a stone’s throw away from its all time nominal highs.
It will likely be a busy trading session tomorrow morning, although not necessarily to the upside. The market perception to bailouts in the past has been mixed. For example, the passage one of the largest bailouts in history, TARP, was not met by the market kindly in October of 2008. Expect fireworks.
Do you believe this is enough to solve the Greek debt crisis? Feel free to leave a comment below.