Felix Martin, economist at Thames River Capital’s global credit team, said domestic pressures would likely play a dominant role in the way eurozone partners handled the Greek financial crisis.
“Politicians in both borrower and creditor countries are under intense and local pressures from their constituencies and it is these pressures, rather than any technical analyses of long-term economic prospects, that we believe will determine the end-game for the European debt crisis,” he said.
“Following a week of youth protests in Madrid, Jose Luis Zapatero’s Socialists suffered a disastrous string of results in the weekend’s regional elections, whilst Angela Merkel’s CDU fell to third place, behind both the main national opposition parties (SDP and Greens) in Bremen.”
Martin said the sticking point was not whether Greece should get an extension to its programme but rather how the costs of such an extension should be shared out between eurozone taxpayers, private sector bondholders and the Greeks themselves.
“The German government reiterated their position that any restructuring prior to 2013 is unacceptable. Since their position is also that there should not be any ‘Transfer Union’, the implication is that the Greeks must either reduce their financing need e.g. by increasing their austerity programme, or increase their contribution e.g. from more privatisation. Other eurozone countries think the private sector must also contribute through a ‘re-profiling’ of Greece’s debt.”
However Martin said both views were inconsistent with Greece’s longer-term creditworthiness, suggesting that securing another year’s financing would not solve the problem.
The key question for official and potential private sector lenders, he said, was why they would extend, or be bailed into, the existing programme, if it would not restore creditworthiness.