Greece Calls New Elections After Coalition Talks Fail

Should Greece fail to adhere to the terms of the bailout, however, it could trigger a default on bond payments. Despite that, Greece would make a bond payment due on Tuesday to the holdout owners of an instrument coming due that day, according to an unnamed government official. The official said in a Reuters report that the remaining holders of the May 15 Hellenic Republic note, which had been partially exchanged during a debt restructuring early in March, would receive payment. It is the first issue to expire since the debt swap was concluded. The official did not say whether other holdout owners of other issues of Greek debt might expect to be paid.

Greece also sold 1.3 billion euros ($1.67 billion) of three-month T-bills on Tuesday, although yield rose 14 basis points from its previous level at an April auction. The proceeds will cover a rollover of an earlier 1.6 billion-euro issue that comes due on May 18. The other outcome of rejecting the bailout that is feared across the euro zone is a possible exit of Greece from the joint currency bloc. While former Prime Minister Costas Simitis said on Tuesday that an exit from the currency would be a “catastrophe” for Greece, European leaders have begun to discuss the possibility they once regarded as impossible. There is no provision in the euro zone’s treaties for the exit of a country from the group.

Marchel Alexandrovich, a senior European economist at Jefferies International in London, acknowledged this when he was quoted saying in a research note, “The euro breakup story is gathering steam again. If Greece were to ever exit the euro, no amount of reassuring comments will convince investors that other countries won’t soon follow.”

Europe faces additional unsettling changes, with the inauguration on Tuesday of the newly elected President Francois Hollande, whose anti-austerity, pro-growth platform carried him to victory over former President Nicolas Sarkozy. The rejection of austerity by the French as well as the Greeks, in addition to a resounding defeat over the weekend of Chancellor Angela Merkel’s party in North Rhine-Westphalia, Germany, indicate that change may well be coming to the way Europe does battle with its fiscal woes.

Although Merkel has said that her view on tight fiscal measures has not changed, other viewpoints have been swayed by the number of defections among the members of the euro zone. Most of the governments in the E.U., as well as the European Commission (EC) and the IMF, have become convinced that it may be necessary to allow some countries, in particular Spain, additional time to get deficits under control.

Charles Grant, director of the Center for European Reform in London, was quoted saying in the report, “Merkel will find it hard to resist them all.” She may indeed be compelled to consider changes in domestic policy as well; her party’s defeat over the weekend, coupled with infighting among the members of her governing coalition, could cause her to face the prospect of instituting growth measures at home as well as abroad.

Ireland in particular is watching these struggles, particularly in Greece, with concern. An upcoming vote on the new E.U. fiscal treaty set for May 31 has been more or less turned into a referendum on whether that country wants to remain in the euro zone. Ireland has been under stringent austerity measures since the collapse of its real estate bubble, and while other countries point to it as an example of sterling behavior in its adherence to those measures, the Irish themselves are growing weary of their strictures and could vote against the treaty.

Should Ireland reject the E.U. treaty, however, it would no longer have access to funding from the European Stability Mechanism (ESM) and would likely be unable to return to world financial markets as it has hoped, since it would be viewed as a higher default risk without the ESM funding as a support. A change in policy toward Greece, however, could open the door to a change for Ireland as well—something many in its government have been pushing for.