So as Wayne Swan awoke this morning to continue selling the 2012-13 budget, did anyone overseas care? Well, not about our budget.

Greece is now dominating the headlines, the talk around the tea urns and coffee houses of Europe and the US, not to mention the various trading desks in banks and brokers around the world. Fear and loathing is back in vogue as the eurozone crisis returns for a third year, full blown and starring again the recalcitrant Greeks who are refusing to accept any responsibility. They are preferring (as voters have across Europe in the past two years) to blame politicians and not themselves. Ignoring the fact that they the voters put those governments into power and supported their policies for years (France, Greece, the UK, Spain and Italy, for example).

What confronted the Treasurer though contained a sliver of good news, an Australian dollar weakening towards parity: it was about $US1.0070 just after 11am, down more than a cent in the past day or so and looking like it could end up in the mid to high 90s if Greece continues to cause everyone to sweat for a third year running. A weaker dollar will be good news for the government, for our terms of trade and for swathes of industry, from exports to retailers, not to mention the banks, but it would also tell us that there are some very troubled times ahead.

Spain also grabbed some headlines by taking a crucial first step to fill the black holes in its banking system by bailing out one of its biggest banks, and Germany’s economy is healthier than previously thought with industrial production rising sharply in March and the IMF forecasting a jump in growth in the second half, meaning there’s every chance the economy will escape the recession now gripping much of the 17-country eurozone.

But it is poor, broken, dysfunctional Greece that had again commanded the attention of markets and got the Reserve Bank again worried, not to mention other central banks.

Greece will need cash in June, just as voters look like being forced to return to the polls for a second time. The European Central Banks, Germany and the International Monetary Fund are the only groups that can save Greece. But its politicians, especially the new left-wing groups, are busily insulting them and trying to repudiate the two bailouts and the new loans.

That is now a very real possibility with Greece’s left-wing parties, which did well in Sunday’s election, trying to form a government and busy rejecting the bailouts in a fit of typical Grecian bravado. In a fit of pique they have declared as illegal the two bailouts of the country. They said they would renegotiate the rescues, that’s if they win power and can form a government. The reality seems to be that the left will fail and Greece will probably have a second election on June 17 (stick that in your diaries) to try and get a reasonable result.

And if that doesn’t work, there are warnings of an Armageddon-like situation confronting the EU and eurozone, with Greece defaulting soon after the poll and leaving the euro in the northern summer (or sooner should the left-wing parties conjure up a government).

The upshot for Australia is that if all works, that extra $7 billion we will give to the International Monetary Fund to boost Europe’s so-called firewall, is looking like it could be called upon in the next year. That could be to save Greece, again, or it could be to defend the eurozone from collapse as a departing Greece plunges the world financial system into GFC Mark 2.

Greek Premier Lucas Papademos will leave office next week, making way for a caretaker administration. That means further reforms, including finalising a new €11.5 billion medium-term austerity package, will be stalled until a new government is in place. The stalemate puts at risk the timetable for disbursement of Greece’s next loan tranche from its second €174 billion bailout. The chances of those cuts happening have diminished markedly this week. And, despite a recent transfer of €3.5 billion to cover financial emergencies, the country faces being unable to meet pension, salary and debt commitments next month.

The rhetoric from the Greek left is sadly familiar, illogical and very Greek. Alexis Tsipras, the leader of the left-wing group, Syriza, which finished second in Sunday’s poll, heads a group that includes self- employed business people who object to being exposed to competition, unemployed graduates who don’t want to emigrate to find work, other middle-class voters who object to paying more tax and paying their fair share of the cost of Greece’s boom. There are ex-communists, Maoists, Trotskyists, socialists and greens.

Tsipras says, that if he becomes prime minister (so far he’s not making headway in his attempts to form a government) he wants to cancel the severe budget-cutting measures forced on Greece by the two bailouts. Laws that cut pensions and salaries and those that “cancel basic workers’ rights” must be annulled as well.

He called for state control of the banks, which “remain in the hands of the managers who bankrupted the system,” he said. And that’s the silliest idea of all, or is it the moratorium on all debt repayments? So one of the measures he wants to annul is the €50 billion included in the second bailout to recapitalise Greece’s banks. The moratorium on debt repayments would presumably apply to loans from the European Central Bank to Greek banks.

So would the ECB continue providing loans to these banks if the Greek government seized them and the banks failed to be recapitalised? There are an estimated €70-90 billion now in banks outside Greece that has been sent offshore in the past two years as the situation has worsened. Will that money return if Greece defaults? It will and those with their money offshore (anyone in the new left-wing parties?) will make a killing. Of course, that’s assuming the ECB and EU and IMF would allow the money to return.

And having seized the banks and stopped paying loans, who would lend money to Greece so the country can import oil, pharmaceuticals and all those other things the country doesn’t produce, but needs to continue existing. Once imports collapse, Greece fails to function. The new government would no doubt promise new funds, but where would the money come from? Greece could “make” it or coerce the central bank into some sort of monetary easing, but that would spark a surge in inflation and further damage the economy and especially those voters who supported Syriza.

No wonder the markets are wobbly. The weakening Australian dollar may help save us, for a second time in four years, from another GFC, just as it did in 2008-09, helped by the cash splash and big rate cuts from the Reserve Bank. Last night we got a little bit of cash splashing, we have already had 1% of rate cuts since last November and the RBA has always been more worried about Europe than many local economists have been.

Peter Fray

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