The Greek Solution

By FLOYD NORRIS
The Greeks appear to have come up with an interesting way to deal with the fact that any Greek government will face intense pressure from Germany and some other European countries to accept more and more austerity that will be rejected by most Greeks.

Don’t have a government.

The elections held Sunday seem likely to result in an impasse over the formation of a government. The two traditional parties got fewer than a third of the votes between them, which may seem fitting considering that they got Greece into the mess. Nearly all the rest went to parties that oppose the austerity deal but also despise each other.

If no coalition government can be formed, a caretaker administration would be formed — with no mandate to do anything — and new elections called. Would Europe pull the plug on such government? If not, the stalemate could go on for a while, with no assurance that a second or third Greek election would settle anything.

The German position, repeated by Chancellor Angela Merkel after the Greek vote, has been that the European austerity agreement is sacred and must be respected. Her position would be stronger if that deal had actually been ratified. If one or more countries refuse to do so, there is no agreement.

Perhaps that could lead to a less onerous deal. Eventually, Germany could conclude that it cannot maintain the euro zone as it is, with the rest of Europe suffering while Germany prospers, and that it will either have to compromise or accept a breakup of the zone that would hurt Germany badly.

In the meantime, investors presumably will worry, and prices of the new Greek bonds could continue to fall. The new 10-year bond, issued in the recent restructuring with a 2 percent coupon, was trading for about 24 percent of face value on Friday, for a yield to maturity of 20.6 percent. Today the price is under 21 percent of par, for a yield of 23.3 percent.

economix.blogs.nytimes.com

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