Markets are signalling that tonight’s vote of confidence for the government of Greek Socialist leader George Papandreou will pass.
If that happens (I don’t take anything for granted in the Eurozone kabuki theatre these days) then the next step in this Greek tragedy will come next week when a package of austerity measures is put to a vote before the Greek parliament.
The new austerity measures include spending cuts, tax increases and the sale of government assets. If the Greeks don’t pass these measures then the EU and IMF have threatened to not release new funds to Greece (whether they would carry through on this threat is an open question). Without these new funds Greece will run out of cash next month and default.
The Greek Bargaining Position
While a Greek default would perhaps be bad in the short-run for Greece, it would be far, far worse for the Eurozone and rest of the world. Given the risks of financial contagion and a pan-European, if not global, banking crisis that a Greek default could trigger, the Greeks find themselves in relatively strong negotiating position. And the Greeks, the EU, the ECB, and IMF all know this.
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