Global financial markets will remain tense today ahead of a knife-edge vote in the Greek parliament on the latest austerity package, while thousands of demonstrators again are expected to hit the streets to voice their anger at the latest measures.
Shouting “the bill will not pass”, thousands of trade unionists gathered outside the parliament building in Athens overnight. Riot police fired tear gas on a group of youths who were smashing shops and setting fires in the streets. A 48-hour strike by public-sector workers has closed banks and government offices around the country and disrupted transport.
Despite the strong opposition in the streets, the Socialist government expressed confidence in the country’s ability to implement the drastic €28 billion ($A38 billion) package of spending cuts and tax cuts. Unless the measures are passed, Greece will not receive the latest €12 billion instalment from the European Union-IMF rescue package, which would put the country at risk of imminent default. It would also put an end to efforts to cobble together a second bailout for the country that is weighed down with €350 billion of debt.
Greek Prime Minister George Papandreou appealed to his deputies to back the package, saying it would “guarantee the smooth operation of the state in the immediate future and give us security in the years ahead.”
Overnight, senior Greek officials stepped up the pressure on wavering deputies by pointing out the catastrophic consequences of failing to pass the latest package.
Theodoros Pangalos, Greece’s deputy premier, warned that Greece would miss out on the €12 billion in funding that is planned as part of the country’s EU-IMF bailout. “If we don’t get the money, we face a terrible scenario … a return to the drachma, with banks besieged by terrified crowds wanting to withdraw their savings.” He added “we will see tanks protecting banks because there won’t be enough police to do it.”
Greece’s central bank chief, George Provopoulos, told the Financial Times that “for parliament to vote against this package would be a crime — the country would be voting for its suicide”, he said.
The Socialists control 155 seats in the 300-member house, and only one Socialist deputy has indicated he will definitely vote against the package. However, several others have been strongly critical of the package and could abstain from voting. The Socialists are hoping to round up a clear majority for the bill, without having to rely on the support of politicians from conservative splinter groups.
The European Union also stepped up the pressure on Greece to pass the bill.
Olli Rehn, the EU’s top economic official, said adopting the austerity plan was “the only way to avoid an immediate default” for Greece, adding there was “no Plan B”. EU president Herman Van Rompuy echoed Rehn’s concerns, warning that “the coming hours will be decisive, crucial not only for the Greek people, but also for the eurozone and even for the stability of the global economy”.
Some analysts have warned that Australian banks, which are heavily dependent on offshore funding, might suffer a funding shortfall should Greek debt default trigger a fresh global financial crisis.
But in an important speech yesterday, Reserve Bank assistant governor Guy Debelle pointed out that the central bank had the capacity to ensure that Australian banks had sufficient liquidity even if global credit markets were to seize up.
He pointed out that Australian banks were reducing their reliance on foreign borrowings, as their domestic deposits were growing strongly.
What’s more, he said, Australian banks fully hedge their offshore borrowings into Australian dollars, and the “vast bulk” of their assets were denominated in Australian dollars.
As a result, Debelle said, “the Reserve Bank can meet a temporary liquidity shortfall by lending Australian dollars against the stressed bank’s assets denominated in Australian dollars”.
This means that Australian banks are in a very different situation to European banks, some of which faced intense funding pressures during the financial crisis, because they had purchased US dollar assets, using borrowings denominated in US dollars.
“When liquidity issues arose for those European banks, the ECB was constrained in its ability to provide the foreign currency liquidity to address those stresses,” Debelle said.
*This first appeared at Business Spectator.