Greece bail out. Now what?

As was mentioned in a previous post, the power play between Greece and the European Union was characterized by a whole lot of bluffing on both sides and the conceding side would most likely be Greece as they had very little options. It was quite apparent at the peak of the debt crisis that Alexis Tsipras was building castles in the sky. The fact still remains that a Greek exit from the European Union might weaken the union (there is speculation that Spain, Portugal and Ireland might exit right after). So even though the EU is playing hard ball, this is a legitimate fear. But that aside, the hurdle is not over for Greece as they now have to undertake a handful or reforms to restore investor confidence. Following the events of the past few months, Greece's large indebtedness has finally collapsed on them and exposed the weak economic environment. Greece is well known for their excessive spending without enough money coming in through tax revenue due to serious tax evasion by citizens. Greece, like a lot of emerging markets (which one could now say it is) does not have a well developed tax revenue collection system. This is one of the reforms investors are hoping to see in the near future.

The fact that Greece's debt has spiralled out of control compared to other EU countries such as the PIIGS points at a huge spending problem. Granted, Greece's debt problem began following the 2008 financial crises, it has only worsened since then. And there is also the issue of the EU adopting policies that are favourable to the bigger EU countries like Germany (which is to be expected in a monetary union). However, at some point in the past after the 2008 crisis, there should have been an effort to correct the errors of the system and efforts should have been made to start Trying To balance the budget (meaning they really didn't have to balance it, just reduce the debt) probably by focusing on tackling the issue of tax evasion. But due to the availability of borrowing channels, and the fact that as an EU member they could borrow without people doubting their ability to pay back too much, they continued to accumulate debt.

There will have to be sacrifices on the part of Greece citizens as they would have to pay more taxes and receive less pension payments as time goes by in order to help the effort to start correcting the over borrowed books, and as is required before EU will lend them another 86 million Euro. A significant change in the state of indebtedness or even an indication that Greece is willing to work on it (which is now a sure thing seeing as the austere reform has been signed) will restore investor confidence in due time. The danger with Greece now is that the interest they would have to pay investors has shot to the sky and since Greece does not have anything special to offer investors that they cannot find in other small EU countries, only investors looking for high returns while willing to take high risk will  invest in Greece at this time. In fact, it would be an unreasonable move for them to drop out of the union at a time like this. This is important to note seeing as there are still fears of a Grexit. With a Grexit Greece will have to pay permanently high interest rates to investors (not just in the short to medium term). Permanent in the sense that it would be a long term cost due to the current lack of confidence in the management of the country. Even if they plan to reduce their debt to GDP to about 50-80% which is reasonable, this will take a long time. Moreover, the fiscal carelessness the Greek have displayed so far shows that they might not be able to efficiently manage an independent monetary policy. These and so much more will be the fears of investors should a Grexit occur. With that said there are positives to a Grexit, but those positives will only be realized in the long run and huge sacrifices will have to be made in the short to medium term. Moreover, positive aspects of the exit are only feasible if efficient management of the country's budget and monetary system is not under question.