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Greece reaches crossroads

Analysts hint at the possibility of a military coup, while economists agree with eurozone leaders that there is no other alternative to the deal agreed on the second Greece bailout package.

Greece could face military intervention, after Prime Minister George Papandreou’s decision to axe the heads of the military. Meanwhile, economists agree with eurozone leaders that there is no alternative to the second bailout deal thrashed out a week ago.


The second bailout package was subject to heavy negotiations, where a 50% debt write-off and another €100 billion for the heavily indebted country were eventually agreed upon.


Greek concessions have, of course, been presented within the deal, which includes wage cuts for public sector workers to 60%, 30,000 public sector workers to be suspended, a new pay and promotion system for 700,000 civil servants to be installed, while pensions and lump-sum retirement pay are to be cut alongside higher retirement ages and a lowering of the tax-free threshold to €5,000 a year.


The announcement of the deal initially caused a surge in positive trading across European bourses, with markets reaching peak levels for the year.


But in what many market participants and eurozone leaders perceived as a surprise attack, Papandreou has thrown the deal into near collapse by calling for a referendum, which has since won backing from his own cabinet, although the voting date has yet to be confirmed.


European markets initially panicked, but have made small gains on Wednesday.


“Stock indices across Europe saw tentative gains on Wednesday, with stocks bouncing back somewhat from two previous days of sharp losses after Greece announced it would put its latest bailout deal up to a public referendum,” says Joshua Raymond, chief market strategist at City Index. “However, uncertainty continues and with a multitude of factors to keep an eye on today [Wednesday], there was a lack of trader activity in the morning session. The FTSE 100 gained 0.3% by 9am GMT before returning to flat territory, whilst the DAX and CAC saw stronger gains of around 0.5%, having earlier traded higher by over 1%.”


However, Papandreou is now scheduled, or summoned, to speak with Germany’s chancellor Angela Merkel, France’s president Nicolas Sarkozy and the International Monetary Fund’s managing director Christine Lagarde in emergency talks later on Wednesday.


Fears for the country backing out of the second bailout package and therefore rejecting austerity measures have led many to believe that Greece is on the brink of a default – causing a downfall for the rest of the eurozone member economies.


Economists have voiced support for the second bailout package, by agreeing with Sarkozy’s reactionary statement that “this is the only way possible to resolve the problem of the Greek debt”.


“There is no alternative to the deal agreed by eurozone leaders,” says Holger Schmieding, chief economist at Berenberg Bank in London. “Merkel and Sarkozy have reached the maximum of what they can provide in the deal. Merkel has political constraints while France cannot agree to more as it does not want to threaten its AAA status. However, even if Greece were to reject the package now, it does not necessarily mean it will automatically default, as whoever is in government would probably agree to the same deal that is out there right now but just dress it differently.


“If Greece were to be presented with a more lenient package, what would stop Ireland or Portugal, for example, demanding the same? When a referendum is called, it usually means two things. Firstly, it is more of a vote on the government than the question or issue at hand. If the government were replaced by another party, the new government would dress the existing deal slightly differently and do everything it can to stay within the euro.”


Meanwhile, Greece faces more issues on the home front, as rumours or hints of an impending military coup have circulated the market. In another surprise move by Papandreou, he announced plans to sack the country’s military leaders.


A note from Monument Securities earlier this year highlighted the role of the military in preserving or undermining the power base of the regimes in the MENA region, which it says now “seems appropriate to revisit in the context of Greece and rather more interesting than the seemingly endless discussions of the EFSF [and] Greek debt”.


Marc Ostwald, financial markets strategist at Monument Securities, adds: “[This is] more so given the unexpected announcement that Papandreou intends to dismiss the chief of the defence staff and the heads of the army, navy and air force, which has rather unpleasant echoes of 1974, despite the Greek government's protestations that it had long planned to replace the heads of the armed forces. At best, the timing is unfortunate, at worst it could engender a split in the military, which could in theory at least be a seedbed for an intervention. For the time being, it still appears that Papandreou will lose Friday's vote of confidence, despite Papandreou securing the backing of his cabinet, and in turn this will trigger a snap general election.”


According to data from Monument Securities, it is interesting to note that the Greek military is proportionately very large, especially on a per capita basis, even larger than Syria, and surpassed on that measure only by the Russian Federation. Greece’s total per 1,000 capita of population for the military stands at 37.1%, with Egypt at 17%, Libya at 18.3% and Turkey at 15%.

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