Greece approves austerity package

Greece has pulled itself from the brink of a default after approving a package of austerity measures.

Last week, Greece was told by eurozone ministers that it needed to make further budget cuts of €325 million (c£273 million) as it presented a new austerity plan. These included 15,000 public-sector job cuts, liberalisation of labour laws, lowering the minimum wage by 20% to €600 per month and negotiating a debt write-off with banks.

The new package, which was carried by 199 in favour to 74 against, will now be presented at a meeting in Brussels on Wednesday before bail-out funds can be released.

Greece needs €130 billion worth of bail-out funds before a 20 March deadline. If it cannot make the payment, it will default and, in effect, become bankrupt.

"When you have to choose between bad and worse, you will pick what is bad to avoid what is worse," said finance minister Evangelos Venizelos.

However, the bond contract provides a seven-day grace period for the repayment of principal. In other words, Greece could delay paying bondholders until 27 March without technically defaulting.

Violent protests

Widespread clashes and violent protests - including the use of tear gas by police - were reported in Athens over the weekend and are leading to worries of a surge in support for anti-austerity parties. If this turns out to be true, then at the general election in April, the new government might be unable to meet the conditions of the bail-out package.

Reports last week suggested that the latest official forecasts imply that the Greek debt-to-GDP ratio would only fall to 136% by 2020, implying that Greece may need to reduce public debt by a further €35 billion to satisfy International Monetary Fund (IMF) demands.

"Of course, increasing the participation rate in the debt exchange could help reduce this figure, providing that the estimate is not already conditional on a rate of 100%," commented Ben May at Capital Economics.

Greece's progress will be monitored by the IMF on a quarterly basis.

"If growth is much weaker than the official forecasts, then as soon as the summer, Greece could be under heavy pressure to implement yet more extremely onerous fiscal measures," predicted May, noting that Greek tax receipts were 7% lower than a year earlier in January.

"And even if Greece accepts more austerity and structural reforms in the short term, its appetite will surely fade unless government bond yields start to fall, the banking sector begins to stabilise and economic growth returns. Such developments are a distant prospect," he added.

Louise Cooper, markets analyst at BCG Partners, echoed May's view. "The parliamentary vote last night is being viewed as an important step to save Greece but it is just that, one step, with a marathon still to go and a knackered and unfit runner," she said.

Greece has consistently failed to deliver on promises, which has led driven eurozone ministers to increasingly levels of frustration. With an unemployment rate of 20%, it faced the potential of bankruptcy and a potential exit from the eurozone if it did not service its debts.

Cooper believes that were it not for the impact on the rest of the eurozone, Greece would have been allowed to fail months ago.

A Greek bankruptcy could lead to a contagion and even a break-up of the eurozone, something that the eurozone leaders do not want. As Germany's Angela Merkel has said: "if the euro fails, Europe fails".

Is Italy the next Greece?

With €1.9 trillion in outstanding debt, Italy's debt burden is greater than Greece, Portugal and Spain combined.

With the potential contagion fear, it comes as no surprise that Italian Prime Minister Mario Monti urged the International Monetary Fund last week to be more lenient with Athens in bailout talks to prevent "a big potential explosion".

While he welcomed the IMF's insistence that Europe erect a strong firewall to prevent debt contagion from spreading, he also said the fund should not be too rigid in how it applies its lending requirements.

On his visit to the United States, he highlighted that his 12-week-old government had already seen positive results from a €30 billion austerity package introduced last year in the midst of a political and budgetary crisis and that the drop in Italian bond yields since then was a sign of greater market confidence in the country.