Has Greece's exit lost its horror?

European leaders seems to have to come to terms with the possibility of a Greek exit from the eurozone, but markets are far more sceptical of the region's ability to cope with such a situation.

Global stock markets pushed higher overnight, buoyed by blithe hopes of more money printing by central bankers, and oblivious to the growing storm clouds once again gathering over Europe.

It’s clear that European officials now accept there is an extremely high likelihood that Greece will be forced out of the eurozone in the next few months, and are consoling themselves with the idea that they will be able to control the fallout.

On Monday, Jean-Claude Juncker, the Luxembourg prime minister who leads the eurozone’s finance ministers group, said in a German television interview that a Greek exit "would be manageable but that does not mean it is desirable.” Asked whether he could rule out Greek exit, he replied, "At least until the end of the autumn. And after that, too.”

Juncker’s comments are significant because he has previously been much more strenuous in his defence of Athens, emphasising that a Greek exit was not a "working hypothesis”, and criticising those who raised the prospect. These included German Economy Minister, Philip Rsler, who recently repeated his doubts about whether Greece would remain in the eurozone, adding that he thought that a Greek exit had "lost its horror a long time ago”.

In the past two years, Greece has been the recipient of two bailout plans, totalling €240 billion ($US297.4 billion), but has had to agree to savage budget cuts and sweeping economic reforms in return. It’s now glaringly obvious that Athens has fallen badly behind in reaching the targets it was set in its latest €130 bailout plan, agreed in February.

The 'troika' – experts from the International Monetary Fund, the European Central Bank and the European Union, have been examining Greece’s budgetary performance since mid-July. Their report, which Berlin is expecting to receive by mid-September, will determine whether the country receives the next €31.5 billion in aid – money it so desperately needs.

The troika is insisting that Athens needs to find an extra €11.5 billion in spending cuts in 2013 and 2014. But Athens is struggling. "The numbers are not easy to find; the €11.5 billion is a significant number and we are not there yet. We are short by about €3.5 billion to €4 billion," Greece’s finance minister, Yannis Stournaras confessed to reporters overnight.

He signalled that Greece could try to bridge the gap by putting thousands of public servants in a special labour pool at reduced pay. He also pointed out that the Greek government was passing legislation to make it easier to sell off Greek government assets.

But these efforts are likely to prove too little, too late. The troika is also now deeply concerned that the severity of the Greek depression – the economy is now expected to contract by 7 per cent this year, instead of the 4.7 per cent forecast back in February – means that the country’s debt burden is unsustainable.

As part of the February bailout, private sector lenders to Greece agreed to write off about 70 per cent of their loans to the country, and it was hoped that Greece’s debt burden could be reduced to 120 per cent of GDP by 2020 – a level the IMF considered sustainable. But Athens has missed this target by around 10 per cent of GDP, or around €30 billion.

The IMF is insisting that Greece’s debts be reduced to "sustainable” levels before it consents to the release of billions of euros more in aid to the troubled country. It is pushing for eurozone governments to do more, by cutting interest rate cuts on their loans, or agreeing to write down the value of their loans to Greece. Even more controversially, it has raised the possibility that the European Central Bank could write down the value of the €40 billion of Greek bonds it holds.

But the ECB is staunchly resisting any writedowns, and Berlin is adamant that Greece should not receive any further concessions. Germany has repeatedly cautioned Athens that it must stick to the program it agreed to in February, and that no extra German financial aid will be made available.

Already, Europe has resigned itself the idea that the troika’s report on Greece will be negative, and that as soon as it hits the in-tray of German Chancellor Angela Merkel, the debt-strapped country will find all its aid money cut off. At that point, Athens will have no choice but quit the eurozone, default on all its debts, and start printing its own currency.

And although Belgium believes it has the skills to "manage” the situation, financial markets will be far less trusting.

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