Beware of Market Complacency and Greeks Freezing Outlays

Some troubling signs from Greece just as the market has continued its low volume meltup.  I have a feeling September is going to be fuuuuuuun:

Even before the troika conducts its quarterly review on Greece's progress in hitting the targets set out in the bailout program, there are a few indications that progress hasn't been good. This week, the government imposed a spending moratorium and reports surfaced that prime minister Samaras will propose to the troika that Greece's fiscal targets be relaxed. These are obviously not encouraging signs, but they have potentially huge implications for Greece going forward that extend beyond just the next troika review. First, the Greek government has imposed a moratorium on all outlays other than salaries and pensions, according to Greek newspaper Kathimerini. This means that primary spending, the public investment programme and the settlement of arrears have been halted.

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Second, the Greek government has reportedly decided to propose a relaxation of its fiscal targets to Merkel and Hollande next week. Having been unable find agreement among the Greek coalition partners on EUR11.5bn in savings (a whopping 5% of Greek GDP), prime minister Antonis Samaras will request that the adjustment be made between 2012-16 instead. He is also likely to suggest that the budget deficit be slashed by 1.5 percentage points of GDP annually rather than the current 2.5 percentage points.

This will be a very hard sell for the Greek government. A relaxation of fiscal targets would require additional funding for Greece, but asking the Bundestag to approve more bailout money for the small country is an absolute non-starter.

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If the troika does not grant the Greek government any concessions on its bailout programme, it is highly likely that the two junior parties—the Democratic Left and Pasok—will drop out of government. This would precipitate fresh elections, the third for this year alone.