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By Shavasb Bohdjalian
The euro struggled near a record low against the Swiss franc and was stuck in tight ranges against the dollar, ahead of this week's decision by the Greek parliament on whether to back austerity reforms demanded by international lenders.
Reports that as many as four PASOK deputies are considering not voting in favour of the government may seem an exaggeration and in most likelihood, all the PASOK deputies will vote to pass the austerity package. As Deputy Prime Minister Theodoros Pangalos said in a weekend interview, a number of PASOK deputies will most likely vote in favour of the overall package but against the single privatization legislation, which will be tabled before the Greek government in the following weeks.
It was slightly disconcerting that Greece’s Central Bank Governor Provopoulos is criticizing the austerity measures ahead of the vote as per the FT. Provopoulos and others have every right to criticize the package, but their timing is very bad.
The Greek Premier George Papandreou wasted a year in power and has not merged hundreds of state organizations to cut out waste. It has not even done one single privatization since taking office. If they were serious, the government would by now have cut down all unnecessary expenses to register a primary surplus before interest.
Instead, Papandreou has been wasting everybody’s time by taking stop gap measures instead of attacking the core problem of stamping out waste.
Greece is playing with fire since it is sending the message that it is not serious to put its house in order. Amid such confusion, nobody should be surprised if EU policy makers start looking at measures on controlling their banks and economies from a possible Greek default.
Their immediate worry is to protect their banks, and recent reports suggest that the exposure of German and French banks to Greece is fast declining, meaning a possible default in the months to come may well be contained.
I’m sure that come Wednesday, the Greek government will pass the austerity measures, paving the way for the release of EUR 12 bln from the first tranche of EU/IMF aid and most probably, the EU will deliver a second package of aid worth as much as EUR 80 bln to see Greece through its funding needs in 2014, but everybody’s patience with Greece is running out.
In my opinion, once EU leaders are sure that Spain has covered its budgetary situation and its economy is resuming a growth path, which will lessen the risk of contagion to Spain, then the mechanism will go into place to force Greece into a default, if by then Greece does not deliver.
It is unfortunate that Papandreou is in power and does not have the ability to run the country in a proper way, but for sure, the EU will overcome the crisis one way or another, with or without Greece.
If indeed the Greek parliament passes the austerity package, the short term crisis on the euro will pass and attention will turn to the US, which risks a shutdown on August 2 if the debt ceiling is not raised. But I believe a last minute solution will also be found as nobody would risk cause a renewed debt crisis on the other side of the Atlantic.
Forex traders and equity investors are thus urged to follow the political events closely, but we should not get carried away into thinking that another Lehman default is round the corner. When EU leaders decide that Greece should default, they will provide adequate warnings and prepare the market for the event, so that the actual default does not cause market upheaval.
The time is not yet ripe for Greece to be allowed to default. At least not this week!
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
