Sunday, 28 February 2010

The law of unintended consequences

As the Greek government prepares for harsh cuts on public spending, markets and ratings agencies start fearing private finance will be contaminated by public finance. I could not put it any better:
Fitch Ratings, citing concerns about Greek banks' funding costs and profitability, downgraded the country's four major banks to triple-B, or two notches above "junk" status. Fitch characterized its outlook for Greek banks as "negative."The main worry is that Greece's efforts to lower its deficit through austerity measures will quickly spread deep into the Greek economy, lowering demand for loans and cutting into bank profits.
Will the Greek government rescue a possible next wave of failing banks?
To do so would be equivalent to let public imbalance enter through another door, thus keeping the threat of default on the horizon.
And these are not the only possible negative consequences of the austerity plan. Such a plan is just one big gamble, and under EMU conditions not even a potentially successful one.
Pressure is rising for Portugal to follow on Greece's steps. Last Friday, the Minister of Finance has shown the way: salaries and "social pay" (a vast category including all sorts of pensions, guaranteed minimum income, unemployment benefits and some other minor items) will be cut.
We should pay heed to the warnings coming from Greece.

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