Cautious optimism as Greece votes for austerity

Greece1European stocks have risen in response to the Greek government's decision to pass austerity measures worth €28bn, which are seen as a crucial step towards ensuring the state does not become the first Eurozone country to default on its debts.

The banking sector performed particularly well with the STOXX Europe 600 Banks index rising 0.8%.

However, turmoil on the streets of Athens highlighted fierce opposition to the cuts. Armed police bombarded protesters with tear gas as opponents of the austerity measures broke into office buildings and started fires that blazed well into the night.

The unrest is likely to continue as parliament reconvenes today to vote on a measure to speed up the pace of the austerity regime.

But although investors reacted with relief to the news, there are still many obstacles to overcome. Some observers are sceptical that the Greek government can implement the austerity measures in the face of such strong opposition, especially given its poor record on controlling tax evasion.

Another concern is that the current austerity efforts will merely postpone a Greek default. The Greek government is trying hard to pass the measures because it is in primary fiscal deficit – its income from taxes does not cover basic expenses such as wages and pensions. As such it needs help from the other Eurozone countries, principally France and Germany.

However, if Greece were to succeed in wrenching itself out of primary fiscal deficit, it would become less reliant on foreign aid. According to the BBC's business editor Robert Peston, this is the time when the Greek government would be most likely to choose to default.

This would be disastrous for foreign banks, which have lent the Greek public sector $54bn (€38bn), according to figures from the Bank for International Settlements.

©2011 funds europe