Greece still needs to address its solvency issue

Greek Prime Minister Papandreou has narrowly averted economic disaster as parliament agreed to the Greek austerity measures.

This will lead to a further bail-out of the country and fends off the risk of default. The austerity measures will see a €28 billion (£25 billion) package of tax increases but he now faces unrest in the country and like the mythological Greek king Sisyphus - condemned to roll a boulder up a hill only to have it roll back down again just before reaching the top - will have only survived one crisis in order to face the next.

Unless Greece can pull off the seemingly impossible and grow its way out of debt, which we doubt very much, the solvency issue will still have to be tackled.

However, delaying the inevitable is the best option.

It hasn't been spelt out explicitly but European officials are at present trying to follow a course of managed default. They are using liquidity measures as a way of trying to delay a default for as long as possible, in the hope that the banking system will be better placed to deal with it later rather than sooner.

Indeed, the numbers show that the more time passes the more peripheral debt will shift from the private sector into the hands of Europe's bailout fund and the European Central Bank.

Delaying a managed default also gives the Greeks a chance to eliminate their primary deficit, which excludes interest payments, first.

For more on the eurozone crisis, read: Eurozone woes offer little hope for small investors.

Outside assistance for the Greek economy would have to take the form of either more solvent countries lending Greece money at an interest rate of one or 2% or, better still, taking on responsibility for paying back a large proportion of Greece's debt. The core eurozone countries have the fiscal headroom to do this, but it is doubtful that their political leaders would be able to sell such a plan to their voters.

Greece could become internationally competitive by reducing nominal wages very aggressively, which is the path it is attempting to follow at present. It seems increasingly unlikely that the Greek population will comply with this approach.

Eventually someone will come to power with a willingness to pursue a far faster international competitiveness - currency devaluation. Some of this is likely to come courtesy of euro weakness, but the scale of devaluation that Greece needs can only come from exiting the euro.

However, if Greece exits the euro, its euro-denominated debts would become even larger in 'new drachma' terms, and this would consequently trigger a default. A default would in turn wipe out a large portion of the capital held by the Greek banking system, which would have to be recapitalised.

The Greek government will continue to face this Sisyphean task of struggling from crisis to crisis, unless or until its stronger neighbours take 'the boulder' away or it succumbs to exhaustion and defaults or abandons the euro.

For investors, gold remains an important component of portfolios. It can make further gains from here if policymakers from other heavily indebted western economies continue to succumb to the temptation to keep interest rates below inflation rates or their currencies falling as a way of covertly easing their own debt burdens.

Carl Astorri is head of economics and asset strategy at Coutts.

This article first appeared on moneyobserver.com in June 2011.