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The Future of Greece: Is Default Inevitable?

Today there is a confidence vote on the leadership of the Panhellenic Socialist Movement (PASOK) and its leader, Prime Minister George Papandreou.

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Greek Parliament has 300 members and a simple majority of 151 votes wins the day and Papandreou stays in power. ‘Papa’ has a tenuous hold on power, with the PASOK party holding just 155 of the 300 seats and two party member have suggested they will vote against the austerity plan (and perhaps Papa himself).

One political analyst in Athens told me he thinks Papa will get the 151 votes (he estimated 155, actually). If this happens, my source says, many people will not be happy and 'express that.' It is also expected the generate some heat among the protestors in Syntagma Square outside Parliament.

Strange things happen in politics, and if Papa does not get the needed 151 confidence votes, a general election would be called for 40 days from midnight tonight. That could push the vote to the end of July, and—more importantly—past the debt payment due dates Greece faces in mid-July. Greece needs a 12 billion euro ($17.2 billion) tranche to make coupon payments in July.

The biggest question right now: What happens to the "troika" (IMF/EU/ECB) deal with Greece if Papandreou is cast out?

Most I spoke with believe the bailout deal would stay in place, for now. However, a vote of no confidence for Papandreou could ultimately impact the bailout, as the current deal is based on conditions and austerity agreed to by Papandreou’s party.

Any change in Greek leadership would likely bring with it new economic and political goals and thus may not agree to the same austerity terms already agreed to with the IMF.

Remember that the EU has stated firmly that for it to fully support the bailout, Greece must have broad political support for the cost cutting and austerity measures, and this could be a tall order given the widely varying views of the five Greek political parties that currently hold parliamentary seats.

Nitos Mitarachi, economic advisor for Greece's second largest political party, New Democracy, told me in a phone interview today that his party would change the austerity plan rather dramatically.

The current measures call for cuts of €28 billion over five years, achieved through a combination of slicing pensions and increasing sales and income taxes, as well as creating a new 'crisis levy' retroactive tax. Mitarachi believes this is the wrong move.

The New Democracy party is more fiscally conservative and feels that lower taxes are the right move, as the notoriously tax evasive Greek’s have become even more so with higher rates. Tax revenues, Mitarachi says, have fallen as tax rates have gone up.

Consistency in leadership and austerity details is important because the EU has firmly stated that political unity in Athens is key to support for the bailout. Given the varied views of Greece’s five political parties this is easier said than done, but not impossible.

Although Portugal effectively lost its government and still cobbled together a group to negotiate with the IMF, it's unclear if a 40-day lame-duck Greek government would be able to effectively negotiate with ECB and IMF officials.

For its part, the IMF also is keenly aware that even if Greece can cobble something together, the group it negotiates with may not be the same group in power in 40 days time, thus reducing the deal to something less than it should be.

Moving on beyond the vote, there have been some new developments around Greek debt today that merit attention...

UK-based think tank OpenEurope puts the total EU member state exposure at €311 billion, with €82 & €84 billion held by France and Germany respectively. Of that, €11 and €8 billion is held on the books of the major banks. France-based Credit Agricole has the largest single exposure, according to Fitch.

OpenEurope believes a default is both inevitable and the right course, and it pegs the first round effects of a 50 percent write down on Greece's debt at a cost of €123 ($144 billion).

The reason the group supports a default because it believes doing a second bailout package will simply add cost to what's likely inevitable anyway, and that adding another €100+ billion to the total will effectively give every Euro Zone household a bill for more than $2,000 to pay off the Greek bailout(s). Put simply, Greece is going to cost everyone on the continent a few thousand bucks in debt.

Fitch's overall estimates seem to be a bit less dire. The ratings firm said in a report today that €37 billion of Greek sovereign debt is held by 34 major European banks, not including Greek domestic banks. Those holdings amount to just 4 percent of these banks Tier 1 capital. That's a small number and unlike Lehman's rapid implosion, most of these banks (hopefully) have seen this coming for a while and have had time to diversity and get liquid.

The biggest pain would come for Greek banks themselves, with Fitch estimating that €45 billion in sovereigns are held domestically. Unlike the well-capitalized Euro Zone banks, this figure would amount to 160 percent of Greek bank equity.

We know what has happened in the past when banks liabilities far outstrip its capital and equity. The largest holder of Greek sovereigns is the National Bank of Greece. Of the five largest Greek banks, Fitch says only Alpha Bank has exposure less than 100 percent of its equity.

Today's Greek vote is big, but the ECB meeting Friday in Brussels may loom larger. Ultimately the money comes from it and the IMF, and any sense of (more) Greek disarray may cast their support into doubt. And let's not forget how the arrest of one DSK may influence the outcome, as the IMF itself is in the middle of its own Greek struggle for order.

Contact Europe: Economy

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