Why the spectre of default just refuses to go away

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

City analysts in London and journalistic observers in Paris and Frankfurt already appear to have drawn the conclusion that it is only a matter of time before Greece defaults. Although the prime minister, the EU, the European Central Bank and the IMF keep on denying such a scenario, the spectre of default keeps returning and is starting to form its own reality, writes Jens Bastian, senior economic research fellow for South Eastern Europe at ELIAMEP, in an exclusive op-ed for EURACTIV.

The following contribution was authored by Jens Bastian, senior economic research fellow for South Eastern Europe at ELIAMEP (Hellenic Foundation for European & Foreign Policy) in Athens, Greece.

"During his recent European road show to London, Paris and Frankfurt, Greek Finance Minister George Papaconstantinou sought to highlight Greece's achievements in fiscal consolidation during 2010 and provide an economic outlook for 2011.

Papaconstantinou was accompanied by representatives of the so-called troika (the IMF, the European Union and the European Central Bank). The troika's presence was indicative of their commitment to making Greece's three-year, €110 billion stabilisation programme work.

But instead of passing on the message of forward momentum manifesting itself in Athens and successful programme implementation taking place, the road show presentations were constantly overshadowed by questions about Greece's imminent default, necessary debt restructuring or soon to be administered rescheduling of sovereign obligations.

The troika delegates repeatedly tried to argue that Greece is on track. Papaconstantinou emphasised the government's political determination to hold its line in the face of mounting fiscal fatigue among the population and returning strike action on the streets of Athens.

However, City analysts in London and journalistic observers in Paris and Frankfurt already appear to have reached the conclusion that the arguments are no longer about whether Greece will default, but rather when.

Put otherwise, in their view D-day is coming. It's a foregone conclusion for them. While Papaconstantinou emphatically denies such a scenario, and the troika categorically rules out such a development, the spectre of default keeps returning and is starting to form its own reality.

The persistency of the D-word in the discussions about Greece's short-to medium-term future cannot easily be brushed aside by arguing that this is the result of speculators betting on insolvency and the need for restructuring. Nor can it be said that because Papaconstantinou and the troika keep denying it, default is therefore simply out of the question.

The heart of the matter is that the D-word is a reflection of two things combined. On the one hand it tells us something about the fundamental credibility deficit that any Greek government continues to face in international capital and bond markets. Here the legacy of the recent past is haunting the Papandreou administration.

On the other hand, the rising spread differential between Greek and German sovereign bonds is the result of market analysts and professional traders looking at Greece in mid-2010 and coming to the conclusion that what they see is still not encouraging enough to reconsider their opinions and trades: despite arguably progress having been achieved.

Their concerns focus on rising public debt while fiscal consolidation continues and the economy is trapped in a recession that is expected to persist well into 2011. Moreover, the shortfall in revenues for 2010, which has now been acknowledged by Papaconstantinou, is not only indicative of the country being in a protracted recession.

Missing the agreed revenue targets for this year is also a reflection of underlying structural deficits in the Greek economy, most importantly continuing tax evasion and massive institutional shortcomings in revenue collection capacity.

The key conclusion from the persistent discussions of D-day looming over Greece can only be to get on with the job of standing firm and rigorously implementing the Growth and Stability programme agreed with the troika.

The reform momentum established over the course of the past months is impressive, but just the beginning of a long process that will have to prevail against the odds and doomsday predictions for many years to come.

Greece is just at the beginning of a reform trajectory that is currently seeking to stabilise the situation while simultaneously moving in the direction of sustainable structural change in its economy, public administration and citizen-state relations.

Any slippage in this process or declining political determination will immediately be registered by those who only associate Greece with a failed economy and forecast D-day approaching.

It is still in Greece's hands and in cooperation with the troika to challenge these assumptions and predictions. Whether they can be proven wrong is an even bigger challenge!"

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