News HeadlinesGreek Prime Minister George Papandreou will form a new government on Thursday and seek a vote of confidence from his PASOK parliamentary group, he said in a televised address on Wednesday...
"Tomorrow I will form a new government, and then I will ask for a vote of confidence."
IMO, Greece missed its first opportunity to use the time it received from the EU-ECB-IMF package to begin to tackle its solvency issues. Another aid package is probably more likely than not, but Greece faces some stiff political challenges ranging from an opposition that is putting future political advantage ahead of Greece's fiscal welfare and popular discontent with austerity. Were the Greek Prime Minister to fall in his "no confidence" vote, that could undermine prospects for a new round of assistance, particularly if no stable successor government could be formed in a timely fashion.
In any case, the next aid package might well be the last option before some kind of default event. Default is not yet a foregone event, but a lot will depend on whether Greece addresses its structural solvency issues. A default event would likely have some spillovers across the Euro Zone and, to a lesser extent, globally. One risk might be renewed focus on rapidly growing fiscal imbalances elsewhere, including the U.S. and Japan.
Things to look for should Greece head for default include:
1) Desperate capital conservation measures. These might include bank holidays, mandatory exchanges of domestic savings for Greek bonds (to provide finances to the government), restrictions on withdrawals, etc.
2) Efforts to launch negotiations with foreign creditors for "voluntary" resecheduling/restructuring, possibly by making rescheduled debt senior to other debt.
3) Intensifying protests that become national in scope and begin to take a material toll on economic activity.
4) The introduction of "temporary" currency-like instruments to substitute for a lack of liquidity (possibly a prelude to returning to the Drachma?) and to provide leverage in demand for additional EU/ECB assistance (as the step could be a transitory one toward reintroduction of the Drachma)
5) A broadening of tax measures aimed at capturing income e.g., taxes on export earnings (though Greece's export sector is very small)
Were Greece to default, reintroduction of the Drachma would not insulate it. The reintroduced currency would plunge in value. With only a very small export sector, the plunge would not significantly boost economic activity. Moreover, Greece would likely be unable to prevent a collapse of its banking system. Even more desperate measures than the capital controls cited in point #1 could be pursued were the banking system to collapse.