They say sequels rarely live up to the hype, but I guess that doesn’t apply to bailouts! Last week, the markets went nuts over news that European Union (EU) and International Monetary Fund (IMF) officials agreed to give Greece a second bailout.
Yup, for the second time, those financial bigwigs opened their hearts, and will soon be opening their bank accounts for Greece! If you remember, it was just last year that the country was granted 110 billion EUR in aid. The second bailout will replace that grant, and will provide financial support until mid-2014, which is one year longer than the original plan.
So far, we know that the bailout will most likely be given in July, but there are still a lot of questions hanging in the air. How big exactly will the bailout be? How much will each donor contribute? Why is Big Pippin so popular with the ladies?
Okay, maybe we should scratch that last question. Jokes aside, these are just some of the uncertainties that the markets hope finance ministers can shed some light on by June 20, when they meet to discuss financial matters in Luxembourg.
All in all, this seems to be breathing life back into the euro. Why wouldn’t it? Markets were all but convinced that Greece wouldn’t be able to meet its financial obligations. But now that a second bailout is in the works, it seems confidence in Greece has been somewhat restored. As a matter of fact, the week after it was announced, the euro surged the most against the dollar in four months!
Now it seems like EUR/USD is on its way to test resistance at 1.4800. With recent economic reports from the U.S. pointing to slowing economic growth, do you think it will be able to trade past the psychological handle?
Err, you may want to hold your horses there, cowboy. The fact is that another bailout is nothing more than just a band-aid solution. It doesn’t guarantee that Greece will be able to revive its economy and pay up its debts the next time around.
It may also send a wrong message to the other PIIGS. The Portuguese or the Irish could be thinking, “Hey! Can we pay you next time, too?” Yikes! Sure, it would only be fair for the EU and the IMF to also cut them some slack but I don’t know if their pockets are deep enough to grant all of them second bailout packages.
On top of that, the top dawg among the euro zone finance ministers, Jean-Claude Juncker, said that the clique would only make things official if Greece agrees to more austerity measures. Ouch! As if the government isn’t already faced with enough opposition with its budget cuts and tax hikes.
The current austerity plan aims to reduce the deficit down by 6.4 billion EUR. I’m not sure how much more tightening the Greeks can take until they give Prime Minister Papandreou the boot or force him to break his promise to the EU and the IMF.
So in this humble not-so-old man’s opinion, it may be best not to rule out risk aversion just yet. Greece might have avoided restructuring its debt for now, but it doesn’t mean its debt woes are gone.