The Greek Parliament early this morning, passed the austerity measures required by the Eurozone Finance ministers for the next traunch of the 130 billion euro/$170 billion bailout. These austerity measures include massive government layoffs and a 22% cut in the private sector minimum wage. The problem is that a vote is one thing, and actually implementing and sticking to austerity measures over time is quite another.
Let us not forget that Greece got into this situation by lying to the EU about how much debt they were carrying in the first place; overspending until their debt was something like 130%+ of GDP, and until it was so out of control that they basically had no choice but to crush their own economy to attempt to get it under control to get the loans they need to avoid default.
I have zero confidence that the unstable Greek government can stick to the plan and permanently cut spending as they must, to avoid defaulting on their sovereign debt. Keep in mind also that a big part of this plan includes cutting the value of their outstanding debt by 70%, which means that the people that loaned them money previously are only getting back a maximum of 30 cents on the dollar.
The only realistic outcome I can see is an eventual Greek default. Just as with mortgage-holders here at home that borrowed money to buy houses they cannot afford, if Greece is going to eventually default, it would be much better for all of us if they just went ahead and defaulted now, rather than dragging it out for years, only to default anyway at some point in the future.
Greece must submit their overall plan for the repayment of their outstanding debt, which again they plan to only pay back a fraction of the principal amount owed (30%), by February 17th. They need to make this deadline so that the IMF and EU will release more bailout money, so they can meet a refinancing of 14.5 billion euros that comes due on March 20th. Under these circumstances, I would submit that Greek politicians are going to say and vote for whatever they have to, to secure the money they need to avoid the default. Voting for something and actually following through with it are two very different things, however. Investors would be wise not to get caught-up in any rally based on the belief that Greece has secured its financial future with today’s vote.