Earlier this week, the Greek Parliament's decision on additional austerity measures got drowned out by all the hoopla of the U.S. elections. Unlike in the U.S. though, the result of this vote was much closer, as the pro-austerity coalition headlined by Prime Minister Antonis Samaras' New Democracy party obtained 153 of the 300 seats.
For those of you who haven't been keeping tabs on Greece, here's a quick rundown:
In order to receive the next tranche of financial aid worth 31.5 billion EUR from the European Commission, International Monetary Fund, and European Central Bank (a.k.a. the Troika), the Greek government had to agree to adhere to additional austerity measures and a tighter budget.
Over the past couple of months, officials have debated and drafted austerity measures that would cut spending by 13.5 billion EUR. According to Samaras, Greece had no choice but to pass the deal otherwise it wouldn't receive any funds, which would most likely mean Greece getting booted out of the euro zone.
Some specifics of the deal include:
- Raising the retirement age from 65 to 67 years old
- Further wage and pension cuts of between 5-35%
- Tax increase on fuel and cigarettes
- Elimination of government workers' 13th and 14th month pay
Unfortunately, the passing of the austerity deal wasn't met with much optimism in the markets.
While part of the reason why EUR/USD price action remained largely unchanged was due to concerns about the U.S. fiscal cliff, I have a feeling that many market players are unsure what to make of the plan.
On one hand, as Samaras said, this may be the only way for Greece to obtain more funding. Without any help from the Troika, Greece wouldn't be able to fund itself, which could collapse the whole system.
On the other hand, there are those who argue that additional austerity measures are too costly, even if they would reduce Greece's debt levels.
In fact, some economic braniacs believe that the latest round of cost-cutting measures may lead to Greece's economy shrinking by as much as 9% in 2013. Furthermore, it could lead to a spike in the poverty rate and push the unemployment rate to as high as 30%! Yikes!
For now, all we can do is sit back and watch as the Greek Parliament steps up to the plate again, this time to vote on the national budget. If the Troika also approves the budget, then Greece will be able to get its hands on the next round of bailout funds by the end of the month.
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