Editorial | Greek tragedy has more acts to play

The Australian Financial Review

Greece’s second bailout by its European neighbours in less than three years may reduce the risk of a disorderly default when a big bond repayment falls due next month. But the €130 billion ($161 billion) rescue deal is built on flimsy foundations, with a very real danger that it is only a matter of time before the whole edifice collapses.

That was well and truly confirmed in a leaked report ­prepared by the European Central Bank, the European Commission and the International Monetary Fund, with the so-called troika warning that the plan was likely to remain “accident prone” and questioning whether Greece would be able to meet its ambitious debt-reduction target.

The tipping point could be April’s general elections.

Although leaders from Pasok and New Democracy have given the European Union written commitments that they will implement the austerity plans, support for both political ­parties has collapsed and anti-bailout parties are on the rise.

The recent riots on the streets of Athens highlight the strong opposition to the austerity measures that the EU has demanded as a condition for financial aid. The Greek economy is also contracting at a rapid pace, which will make it difficult for Athens to meet its deficit-reduction commitment.

All of this has important implications for policymakers here, as has been made clear in recent Reserve Bank of Australia statements.

While conditions in the euro zone have improved significantly following the ECB’s €490 billion liquidity operation in late December, the RBA still views a “disorderly outcome” in Europe as the most worrying downside risk for the global economy. Australian policymakers should therefore be working on the basis that Europe is not yet out of the woods and that its sovereign debt crisis could still take another turn for the worse.

The RBA still has plenty of fire in its armoury, having decided earlier this month to wait and see how Europe plays out rather than cut interest rates for a third straight meeting. But there is also a need for the federal government to maintain a tight ship by tackling the big structural problems in the budget and saving more of the bounty from our China-driven mining boom rather than spending it.

The key lesson to be learned from Europe is the importance of fiscal discipline.

The Australian Financial Review