Relief from Greek election likely to be fleeting
By DAVID McHUGH and MENELAOS HADJICOSTIS June 18, 2012 10:10AM
Supporters of the New Democracy conservative party celebrate at an election kiosk at Syntagma square in Athens, Sunday, June 17, 2012. The pro-bailout New Democracy party came in first Sunday in Greece's national election, and its leader has proposed forming a pro-euro coalition government.(AP Photo/Kostas Tsironis)
ATHENS — Greece’s election result has eased fears of an imminent financial disaster for Europe, but the region’s indebted governments remain under heavy pressure. Spain and Italy are fighting to keep their borrowing costs down and European leaders are struggling to find agreement on how best to fix the shared currency’s deeper problems.
As cleanup crews swept Athens’ central Syntagma Square and took down election posters, Greeks waited anxiously for the formation of a new government, seeing it as the last step to ending at least the acute phase of the current political crisis.
The New Democracy party, which supports keeping Greece’s bailout deal with its European government creditors, was moving to form a coalition government Monday morning after securing a narrow victory over anti-austerity Syriza and its old socialist rival PASOK.
“We’ll breathe easier when there’s a government in place,” said George Moutafidis, who runs a sandwich shop in the Syntagma Square.
“Yesterday’s result is somewhat positive, but we need a government in place to start making decisions. You need to just do it. That’s it.”
A New Democracy-led government could lead the way to talks with international creditors on getting it more time to fix its broken finances. European officials are signaling a willingness to talk — and avoid an aid cutoff that could force Greece out of the euro. A euro exit by Greece could have further destabilized the 17-country single currency union and rocked the world economy.
Any hope that news out of Greece might have eased concern over the state of Europe’s finances were quickly dashed Monday morning.
“The crisis is far from over,” Commerzbank analyst Christoph Weill in a note to investors. “A sovereign default by Greece and the country’s exit from the monetary union have probably been avoided for the time being. “
Spain’s borrowing costs spiraled higher in a sign markets remained deeply skeptical about Europe’s chances to contain and end the crisis. Interest rates, or yields, on 10-year government bonds — a key indicator of how bad the crisis is — spiked to just over 7 percent. That is a new high since Spain joined the euro in 1999 and indicates increasing doubt that the country will be able to manage without a bailout like the ones received by Greece, Ireland and Portugal.
Yet Spain is bigger than the three bailout countries combined, and would stretch the eurozone’s (euro) 500 billion bailout fund if help were needed. The country has already asked for (euro) 100 billion to bailout its banking system, weighed down with heavy losses on bad real estate loans.
Italy has also been caught up in concerns that it might soon be able to keep a lid on its debt without help. Its economy is the third largest in Europe, after Germany and France, but it has a massive amount of debt. The worry is that if Italy’s economy continues to slow, it won’t be able to maintain its debt. Italian bond yields Monday rose to 6.07 percent.
One reason for the market’s wariness over Europe is there is still a lot of work to be done in Greece before it can consider itself out of the immediate danger of full-blown economic collapse and possible exit from the euro.
New Democracy, which still has to reach agreement this week with another party to have enough seats to govern, favors continuing with the (euro) 240 billion bailout deal from other eurozone governments and the International Monetary Fund on which the country has survived for more than two years.
Continued bailout money hinges on keeping to an agreement to cut spending and make Greece’s bureaucracy-choked economy more business friendly so it can grow out of its troubles in the long term. Yet Greece’s plummeting economy is making it harder for it to reduce its budget deficit by the required about. Failure to keep to the bailout deal could result in an aid cutoff, leaving the government unable to repay its remaining debt.
The previous government said the government would run out of money July 20 if more funds are not received. Greece’s economy is teetering over the abyss, with businesses struggling to pay suppliers and depositors steadily pulling money out of already troubled banks. The shrinking economy lowers tax receipts and makes the debt burden larger by comparison.
European finances ministers said the “troika” officials from the European Union’s executive commission, the IMF and the European Central Bank will visit Athens as soon as a government is formed “to exchange views with the new government on the way forward.”
Germany’s Foreign Minister Guido Westerwelle said late Sunday that Greece had to implement all agreed reforms but that “I can well imagine talking again about timelines.”
The country was originally supposed to identify (euro) 11.5 billion in budget cuts for the next two years year by the end of this month. That deadline has probably slipped, and the new government may seek to make the cuts over a longer period.
However, many analysts think Greece may still wind up leaving the euro, either to improve its economy’s competitiveness through introducing a weaker currency, or because it may needs to print its own money to bailout banks or pay salaries.
Meanwhile, Europe’s governments are struggling to agree on measures to put new foundation under the euro. Without agreement on bold new steps, a June 28-29 summit of European leaders may fall short of expectations and lead to even more market tension — as such several such summits have typically done in the past.
“Lending money is all about confidence, and that is shot to bits right now,” said Gary Jenkins, managing director of the Swordfish Research Ltd.
There are also concerns that because Greece has agreed to stick with the bailout, this might alleviate pressure on politicians to act quickly. Expectations for a substantial response from governments are high for a summit gathering of European leaders such as Germany’s Chancellor Angela Merkel and France’s President Francois Hollande next week.
European leaders have conceded the euro’s foundations were flawed when it was introduced in 1999. Rules against big deficits failed to keep governments from running up too much debt through overspending, as in Greece, or needing to bail out banks, as in Ireland and Spain. Proposals could include some form of common borrowing, tighter central EU control of individual countries’ spending and debt, and centralized supervision and bailouts of weak banks.
Yet all proposals are controversial because they involve countries giving up authority over their finances, and Germany, the biggest eurozone member and in relatively good shape, opposed to being put on the hook for other people’s debts.
McHugh contributed from Frankfurt, Germany.