Has Greece Been Resolved?

Currency in Crisis

One might be forgiven for thinking that a 110 bln euro EU/IMF package would suffice for Greece and stabilize the situation as IMF packages typically do over time. However, over the past month 10-year Greek yields have 260 bp and talk of debt restructuring continues to be heard.

The government presented its final 2011 budget today as EC/IMF/ECB officials pay call for the periodic check up. There is much to like in what Greece says. It remains committed to reducing the deficit to 7.4% of GDP in 2011 and has increased the savings to 5 bln euros from 2.2 bln in last month's draft. Initially it had projected to it would only need 1.5 bln in savings.

It is seeking to reduce the primary budget deficit (budget balance excluding debt servicing) to a little less than 1% of GDP.

Its economic assumptions seem fairly reasonable. The economy is to contract 3% next year, worse than the -2.6% initially thought and the unemployment rate is expected to rise to 14.6%. These do not appear far from consensus market expectations.

However, when all is said and done, as the primary deficit shows, Greece will still be living beyond its means next year, albeit by a smaller margin. And, although Austria (and Slovakia) balked at Greek aid back in May and may have axes to grind, the fact of the mater is that Greece is now saying its deficit this year will be about 9.4% of GDP, well above the 8.1% target.

The Greece situation is not resolved. The liquidity issue has been arguably adequately addressed, but not the solvency issue. As Germany's Merkel has found out the hard way, even raising the solvency issue indirectly disrupts the capital markets and raises existential questions. This is why what is unfolding is a tragedy. There is not easy way out. And the solution for one problem, such as liquidity (short-term unlimited by the ECB) exacerbates other problems (keeps insolvent banks alive).