Bankers despair at vote of confidence in Greece

WHAT'S HAPPENED?French President Nicolas Sarkozy and German Chancellor Angela Merkel have issued a statement saying they are "convinced that the future of Greece is in the eurozone".

The vote of confidence in the stricken Mediterranean country followed a conference call with its prime minister George Papandreou in which he "confirmed his absolute determination to put in place all the necessary measures to carry out all of the commitments made", according to the statement.

The news played well with investors, causing Asian and European markets to rally this morning.

WHAT DOES IT MEAN? The Franco-German vote of confidence is significant because worries over a Greek default on its sovereign debts are at the root of much of the recent turbulence in financial markets. The exposure of French banks, which have lent heavily to Greece, has been a particular source of concern.

However, it is debatable whether the positive sentiment will last.

Tullia Bucco, an economist at UniCredit Global Research in Milan, told Bloomberg: "I am sceptical that this will help to reassure markets. The road to the implementation of the second aid package is still quite long and may prove bumpy."

Bucco is referring to the imminent arrival in Athens of a delegation from the International Monetary Fund, European Central Bank and European Commission, which will decide if Greece has done enough tax-hiking and cost-cutting to secure the next payment due under the terms of the second bailout negotiated in June.

Whatever assurances Papandreou has given to Sarkozy and Merkel, a fresh wave of protests against austerity measures has already begun in Greece.

The BBC's business editor Robert Peston says that the bankers he has spoken to are despairing of the failure of Sarkozy and Merkel to put forward a plan to back up their vote of confidence.

He believes there is only one way out of this crisis, and that is for Germany to issue an unambiguous guarantee that it will underwrite the public finances of the eurozone.

In reality, though, "the German people are understandably reluctant to mortgage their futures to nations over whose expenditure and finances they have no direct control".
 
All of which means "it is hard to see how the eurozone convoy can or will do a U-turn on the road to ruin, unless and until that convoy sees that it is minutes away from driving over a cliff".

WHAT NEXT?The IMF-EC-ECB delegation arrives in Athens in the next few days. If they find that Greece is not making sufficient progress in its efforts to balance its budget, they could cancel the next tranche of bailout money. Greece would be bankrupt within weeks.

A spokesman for Merkel told the BBC: "[Greece sticking to its targets] is the precondition for the payment of future tranches of the programme."

The suggestion is that Merkel and Sarkozy's statement yesterday has shades of the infamous football club chairman's vote of confidence in his manager, which is normally swiftly followed by the latter's resignation. Or in this case, default. ·