Wall Street Journal by Simon Nixon – The euro zone is running out of road. Greece’s budget problems have spun out of control to the point where there is an imminent threat to the survival of the single currency. The euro zone’s strategy until now—a mixture of obfuscation, prevarication and broken promises—has comprehensively failed. The market now regards a Greek default as inevitable and unless the euro zone starts to take decisive action to prepare for this outcome, what little confidence remains in the currency block will evaporate.
Until now, the euro zone’s strategy towards Greece has been simple: to keep providing it with bailout funds to cover its deficits providing it meet strict conditions to tackle the shameful culture of tax avoidance and take steps to boost its competitiveness
But that strategy now looks doomed to failure. The Greek government may just have done enough to avoid immediate default: Last weekend’s decision to close a €2 billion ($2.7 billion) budget hole with a property tax to be collected via utility bills should persuade the Troika to pay the next installment under its bailout package so that Greece doesn’t run out of money in October.
But Greece is falling so far behind its bailout targets that the Troika—as its official lenders from the International Monetary Fund, European Central Bank and European Commission are collectively known—may find it hard to ignore much longer: The budget deficit is forecast to be 2.5% of GDP higher than planned, privatization receipts are well behind the official timetable and structural reforms are off track.
No matter how much capital banks raise, however, it won’t insulate them from contagion if the Greek endgame is badly handled. The risk is that a Greek default precipitates its exit from the euro, turning the disaster of default into a catastrophe
The euro zone needs to avoid this outcome at all costs. A Greek exit from the euro would lead to capital flight, mass bankruptcies and hyperinflation in Greece, says Willem Buiter of Citigroup. Worse, it would undermine the euro zone’s credibility, creating a domino effect as markets hunted down the next exit candidate. Even if Greece defaults, the ECB must keep the Greek banking system afloat. But will it?
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