On Thursday, the Greek Parliament passed the second of three steps that are expected to clear the way for the release of additional bailout funds for the over-extended nation, which is teetering on the brink of default.
The EU and European banks, terrified that a Greek default will lead to similar catastrophes for other fiscally-troubled nations such as Ireland and Portugal, are hoping to avoid a European version of the contagion that followed the collapse of Lehman Brothers in 2008, shutting down credit markets.
On Wednesday, the Parliament approved of the $112 billion in austerity measures by a margin of 155 to 138. A vote on specific measures – such as spending cuts, tax increases, and sale of public assets – was taken on Thursday. Greek finance minister Evangelos Venizelos will meet on Sunday with other European finance ministers to discuss release of the next installment of last year’s 110 billion euro bailout package. Talks that could lead up to a second bailout – estimated in the 80 billion to 90 billion euro range – are underway.
The austerity measures have spurred fierce resistance from the Greek public. Demonstrators are battling police in the streets, and the Parliament has complained that the police have overreacted by using large amounts of tear gas against the protesters, who have been throwing rocks and setting fires.
The protests under way in Greece should not be overlooked. Public sentiment may turn out to be the critical and unpredictable element in the resolution of the debt crisis in Europe. Even if lawmakers and bankers can agree on plans for bailouts and austerity measures, implementation will require a certain amount of acceptance by the people of Greece. It isn’t necessarily the violent street protests – unfortunate as they are – that threaten a resolution of the debt crisis. The critical issue is whether the government in Greece will be able to collect the new taxes that the Parliament imposes. Tax collection in Greece has been a problem for years, and there’s no reason to think that it will improve any time soon, with opposition to austerity measures running at a lethally high level.
“There is every possibility that poorer Greeks, who will be hit hardest by the austerity measures, will simply refuse to pay their taxes. If that happens the prospects of a Greek default will go from highly likely to inevitable, plunging the country into the abyss and undermining any benefit the austerity measures may have had,” Max Johnson of Currency Solutions told the Guardian newspaper.
That is one reason why the euro – which rallied on Tuesday but slipped back on Wednesday – likely will remain under pressure, according to Greg Michalowski, chief currency analyst with FXDD. He says the euro, which has dropped on Wednesday from 1.4425 to as low as 1.4325, could decline even further against the dollar. The next resistance level on the way down is 1.42, and 1.40 ‘is not out of the question.’
The euro may well rally as votes clear the way for bailout funds. But the implementation of those plans will take time, Michalowski warns. “And given the level of protests and tear gas in the streets of Athens, it is difficult at this moment to be too optimistic,” he says.
