Articles - Greece update: Another crisis averted, at least for now

 By Azad Zangana
 European Economist at Schroders
 After weeks of uncertainty and political turmoil, Greece's Prime Minister George Papandreaou has won two important victories in the space of a week. These may have secured the next instalment of a bail-out for the embattled country.
 Despite violent protests on the streets, the Greek legislative passed the austerity package on Wednesday, causing a collective sigh of relief to sweep through European markets.
 The news comes a week after Prime Minister George Papandreaou's government won its crucial vote of confidence. Though most had predicted a victory for Papandreaou in these crucial votes, the risk of serious tail-risk materialising was very real.
 The opposition continues to protest against austerity measures, but curiously not against the notion of deficit reduction. But the opposition can afford to be vocal as ultimately it is aware that its credibility is badly damaged due to the previous mis-management of Greece's public finances. If the opposition actually had a real chance to return to power, it would have taken a more responsible approach, in the same way oppositions have behaved in Portugal in this year's election, or in Spain with the next election due within the next year.
 As for the dissenting members of Papandreaou's ruling PASOK party, in the end, they all pulled together, with the knowledge that failure would have been catastrophic.
 Looking ahead, Greece still has to pass a vote on its new privatisation plans and agree the new package with the Troika, which may still involve some kind of voluntary debt re-profiling. Nevertheless, this latest episode highlights the high degree of political uncertainty that is present, and the potential volatility that we should continue to expect.
 Looking ahead in European equities
 We feel that the recent outperformance of core equity markets versus peripheral markets could become a new medium to long-term trend. The need for difficult fiscal tightening will hurt growth and earnings in the periphery for some time, and in our view, the market has not yet come to this conclusion.
 However, in the near term, we could expect some pull back in the core versus periphery trade, purely in reaction to Greece not blowing up this month, and the expected new bailout which should follow in July. We suggest there may be better entry points in the future.

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