From the first week in office, the next government will face significant challenges. First off, a decision will need to be made for the Greek international-law bond maturing on the 15th of May the owners of which have held out from the PSI process. The outstanding notional is not large (about EUR430mn) but the broader implications of a no-payment decision are unknown, while the political backlash from a payment may be large.
Second, by June, budget cuts worth about 11.5bn EUR for the rest of the program period will need to be specified. There is little room left in the budget to promote such an adjustment without affecting public sector wages and pensions.
Third, pressure from international lenders will likely shift on product market reforms going forward. This implies a focus on privatizations, opening up closed professions, reducing barriers to entry for new enterprises, reducing assured profit margins for various sectors etc. Previous governments have been unsuccessful in clashing with organized professional pressure groups and creating a true competitive market for goods and services. Thus the reduction in wages has not been followed by negative trends in market prices as well.
Fourth and final, the recapitalization of the banking system in a format that makes it easy for banks to attract private capital in the future is a key element of the recovery process.
Whether the dispersion of the EUR130bn rescue package continues depends on the new government’s actions, decisions and choices on the issues above. Greece needs the dispersion of funds in order to clear out arrears, avoid cash shortages, and build buffers for additional banking sector recapitalizations in the months to come.
http://www.zerohedge.com/news/preview-monday-morning-europe
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