The Greeks just voted in national parliamentary elections, and did not give a majority to the major parties which sought to pursue continued bailout money in exchange for fiscal reform. Even in coalition, it appears that New Democracy/PASOK cannot form a government. Without a government, it’s hard to see how parliament can implement the fiscal measures which are a condition of more bailout money.
Assuming that Germany sticks to its guns, it looks like the money pumps will be turned off next month, and Greece will have to start paying its bills in neodrachma or some such scrip. Short term, this will lead to utter chaos and financial collapse (Russia, 1998).
There are several possible financial implications of a Greek collapse: (1) it could serve as an object lesson to the rest of Club Med to get its act together; (2) it could spook the debt markets and cause funding crises for Club Med; (3) it could scare Europe into mounting a major exercise to ring-fence Club Med including both the ESM and the ECB; or (4) no impact at all, with Greece being viewed as another bankrupt Balkan.
My money is on #2: that it would alert the markets to the fact that the alternative to austerity is financial collapse (not growth, pace Krugman), and that Club Med is getting tired of austerity (which has only begun to be felt). The ECB has unlimited firepower to fight back against the markets, but the Bundesbank just reiterated today that this is not an option. At this point, Germany wants to wash its hands of all things Greek, and would be happy to see Greece settle Titanic-style to the bottom of the Mediterranean.
If I am right (that Greece will blow up next month), it will mean that M. Hollande’s honeymoon will be very brief. Unless he can say something quite dramatic in the next few weeks, such as “I hope no one really believed what I said about austerity”, he will learn that the bond market is not your friend.
Personally, my contempt for Hollande and the French left is so strong that I am hoping for the worst.