The survival of the euro is a battle between economics and politics. Although the latter can hold the euro together for some time, the economic forces ripping it apart will win out.
Market players have been predicting a Greek default for years, and yet politicians refused to believe it. The default of Greece – and it is a default – shows economics will eventually dominate politics.
This week's events are not all about Greece – a country of only 12 million people. It is really about the impact the treatment of Greece has on the rest of Europe. And it is not good. Time has been bought, but at a very large price. A lot of European political goodwill has been used up in the last few months. When Portugal or Spain needs financial help or concessions in the future, German politicians will take a tougher stance, having gone through the negotiations with Greece.
Investor goodwill has also been used up – banks, pensions funds, insurance companies and otherinvestors have taken massive losses on Greece on the promise that this deal will stabilise the country. This is likely to be too optimistic. By saving the one country that is in too much of a mess to be saved, the policymakers threaten their ability to save the countries that could be saved in the future. What are markets telling us? That Greece is "solved"? Not one bit.
The new Greek bonds are already trading unofficially at a15-20 per cent yield (compared to Britain's 2.1 per cent). So investors think Greece is still a high risk investment, that it will most likely need more bailouts, that it still does not have a sustainable level of debt, and that Greece may default again in the future. Expect prices to plummet when the new bonds start trading on Monday – a lesson for all holders of Euro sovereign debt.
Stefanos Manos, former Greek Finance Minister, said: "We got a reprieve. Whether it is good for Europe I have my doubts." Given the definition of reprieve – postponement of a punishment – I couldn't agree more.