Asia Fallout: Understanding the Greek Crisis

by Moody's Investors Service, 11 February 2010

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topics:
Finance and Banking

tags:
EU assistance Greece liquidity crisis structural reform

How Can Greece Win Back Investors’ Trust?

Faced with situations where markets overshoot, governments also need to overshoot in terms of ambition and execution. Should Greece follow through on the consolidation plan that it solemnly announced last month, it may be able to create a virtuous dynamic. The more rigorously it complies with the ambitious program, the more quickly market conditions will return to a semblance of normality, although not to the buoyancy that characterized them prior to the crisis.

There is an enormous amount of legislation that the Greek government has promised to enact in the first quarter of 2010. When and if the key pieces of legislation, such as tax and pension reform, have been passed into law, they will provide a meaningful signal as to how far-reaching structural reform is likely to be and, ultimately, where the Greek government ratings will end up.

Of course, the previous absence of political will to undertake and then maintain reform means that there is no certainty that the Greek authorities will be able to sustain the effort on this occasion. However, they have more incentive to do so at this point than at any time since the late 1980s.

Overall, we believe that the long-term success of the Greek fiscal consolidation effort – and ultimately how Greece is likely to be rated in five years’ time – depends on three factors:

credible implementation of the programme;

overcoming the electorate's longstanding resistance to structural economic reform; and

regaining the trust of Greece’s European partners and EU institutions and, crucially, the financial markets.

About the Author

This article is an abridged version of "Spain, Portugal & Greece: Confusion or Contagion?", a special comment by Moody's Investors Service released in February 2010.

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