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Is Greece still viable for the Eurozone?

What’s next for Greece?

Faced with record debt levels and a dwindling economy, Greece is gradually becoming a financial pariah in the European monetary zone. For the past few weeks, capital markets have not seemed convinced one bit about the feasibility of the mix of measures taken by country leaders.

What’s even more flabbergasting is that many Euro countries are not willing to lend a helping hand to their counterpart even though many economists posit that, absent an external macro-intervention, Greece will unquestionably fail and such a collapse will be followed by a dire domino-effect on other peripheral economies such as Italy, Spain and Portugal.

Greek authorities don’t have a panoply of good options but the sad truth is that they seem to be losing the PR game to market ‘ill-wishers’, that is, short sellers! Short sellers are traders who bet that the price of a security will fall and thus sell it when such price is still high.

European markets haven’t so far responded well to Athens’ actions and believe Prime Minister George Papandreou needs to act more boldly in tandem with ECB and other Eurozone leaders to assuage concerns of a default. The quintessential fear of European Union founders – the nightmarish scenario where a few countries sabotage growth within the rest of the Union – is alas taking shape.

What options Athens really have? They need to manage their record debt levels by assuaging market scare and putting the country’s economy under control. That means fiscal tightening, which in turn will spark social unrest amidst an already recession-saddled economy.

A bailout from the ECB would also damage Greece’s reputation within the union and also vis a vis financial markets. Ditto for some “structural loans” from other more solid economies like Germany or France. What about exiting altogether the Eurozone and go back to the ‘good ole’ drachmas. Unthinkable!

  1. panathinaeos
    February 2, 2010 at 10:21 am

    The situation for Greece is really grave. Major changes need to be effected over the long term. This is not a situation to be addressed by a “quick and dirty” solution.
    The real risk for the people is that politicians may react to the market pressures without thinking things through. In this case we will have an example of the pendullum effect. All the deficit was created by politicians trying to woe their voters by spending borrowed money. Now the politicians are at the other end of the pendullum, they are trying to woe the markets.
    Both are extreme positions, and do not deliver results. We now this for the “spending” end, we will live through it for the “cutting” end.
    In my view what Greece needs is a National Memorandum with at least five years time horizon, outlining the key structural reforms needed, the reasons and the long term benefits. All political partis should be invited to support the Memorandum and express their commitment to it. A Government of National Unity is also required, as the social unrest cannot be managed by one party alone. All of the reforms will be extremely painful, and as this is a moment of truth, the Political Leadership of the country must spend a lot of effort and time explaining to people why thye need to do this for their children, why they need to sacrifice a lot in order for their children to have a future.

    • February 2, 2010 at 12:05 pm

      This is a great body of thoughts, my friend. The idea of national summit to discuss structural problems and potential solutions is a good one. I would add to that the need to work with other European partners (states, ECB, European Commission etc.) in solving this systemic crisis. The Eurozone must understand that problems within a country can be deleterious to their ‘peripheral’ economies.

  2. February 12, 2010 at 1:35 pm

    “Short sellers are traders who bet that the price of a security will fall and thus sell it when such price is still high.” Yes, but it is erroneous to believe that that is what actually drives the market down, quite the opposite: Speculation is Harmful?. , however, the problem is that its frauds taint the reputation of all the other “sovereigns”.

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