At long last
Greece bailout deal provides more clarity to financial markets
AFTER months of uncertainty, the finance ministers of the 17-member eurozone finally agreed to grant the second bailout worth 130 billion euros negotiated last October to a bankcrupt Greece following more than 13 hours of negotiations.
The last-minute agreement, which ended in the early hours of yesterday, provides more clarity to financial markets as Greece is scheduled to make a bond repayment of 14.5 billion euros on March 20. A default will have consequences for the other countries in the common-currency zone, especially heavily indebted Portugal, Italy and Spain.
As it is, tranches of aid from the first bailout worth 110 billion euros agreed to in May 2010 have been delayed as European Central Bank and International Monetary Fund (IMF) officials put pressure on the government to commit to austerity and asset-sale measures.
The euro rose, Asian stock markets rebounded, European markets opened higher and US stock futures gained.
Now the members of the eurozone and the wider European Union (EU) together with their partners and stakeholders can get along with the business of jumpstarting the economy instead of projecting the image of being tough for their electorates and political brinkmanship.
“Everybody understood that this was the moment of truth,” Belgian finance minister Steven Vanackere was reported by Bloomberg as saying following the conclusion of the talks.
We can be sure there will be no Homeric poems or hymns to the main actors in this Greek tragedy, perhapsapaean to the broken dream of European unity had no deal been struck at the 11th hour.
While the negotiations in European capitals in recent months may seem distant and technical to most people, the impact to livelihoods should a default happen is very real. Notably, financial and trade linkages that bind the global economy together will have come under great stress.
The troubles will have cascaded to businesses and households, crimping growth as jobs are shed and consumption falls.
From the perspective of Asia, a default and the contagion resulting from it will mean another revision of gross domestic product ( gdp) growth downwards following revisions last year by the IMF and World Bank.
The latest IMF’S forecast on Jan 24 shaved three quarters of a percent from developing Asia’s growth, now projected at 7.5% GDP growth yearon-year on average in 2012 to 2013. The World Bank, in its global economic prospects published on Jan 18, projects GDP for developing East Asia and the Pacific to ease further to 7.8% this year and 2013.
Growth in the exports-reliant economies of emerging Asia will dive as the EU (which includes the 17 members of the eurozone plus 10 others) is a major trading bloc and the financial turmoil which a Greek default entails, will have accelerated the decline in economic activity.
The evidence is already in the leading economic indicators which have declined while for the final quarter of 2011, the GDP of the eurozone shrunk 0.3% with reports indicating that the economymay already be in recession.
Although the US economy has not been affectedbya recession in Europe, the “green shoots” of nascent growth may be snipped should European growth prospects worsen. This will in turn mean weaker demand for Asian exports, which are already down because of the eurozone worries.
There are a number of assumptions made here, chief of which, is a commitment by the government of Prime Minister Lucas Papademos to implement the measures promised in order to get the pledged aid.
That commitment has been called into question in recent months. It seems, on the surface, that the EU, confronted with financial chaos and a possible exit of Greece from the eurozone, may have chosen the lesser of two evils and decided on the bailout.
However, the worries of a default will be present for a long time. This is because after five years of recession, Greece will find it tough going for years to come and will have to scrape enough to pay off creditors despite the writedowns by private creditors.
Lastly, deep structural reforms will have to come despite the opposition of various segments of the EU’S population who reject further centralisation.
One of these reforms will involve a fiscal union, which means putting a cap on spending by governments sharing the euro and imposing penalties on those who violate the rules on debt and deficit levels.