The bailout has saved Europe, for now, but it's unlikely to save Greece.
The bailout has saved Europe, for now, but it’s unlikely to save Greece.
The euro130 billion ($172 billion) rescue – agreed to Tuesday after an all-night summit of European ministers – prevented an uncontrolled bankrupcty and calmed investors worried that a Greek default would have started a chain reaction across Europe. But it left key problems unresolved.
Draconian budget cuts could keep Greece mired in recession after five straight years. The deal doesn’t directly address the debt problems in other struggling countries in the 17-country zone that uses the euro. Spending cuts could reduce tax revenue and possibly worsen the government’s finances.
“You can’t shrink your way out of a recession,” said Mark Weisbrot, co-director of the liberal Center for Economic and Policy Research in Washington. “What they are doing to Greece really makes no economic sense.”
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In Athens, Greeks reacted with a mixture of relief and fear of a dark future.
“I don’t see it with any joy because again we’re being burdened with loans, loans, loans, with no end in sight,” architect Valia Rokou said in the Greek capital.
Finance Minister Evangelos Venizelos said the agreement managed to prevent imminent catastrophe: “we avoided the nightmare scenario,” he said.
The agreement was the second massive bailout of Greece following a euro110 billion ($146 billion) rescue in 2010 that didn’t return the country to solvency. It will give Greece euro130 billion in loans through 2014 from other eurozone governments and the International Monetary Fund. It was secured after Greece agreed to painful and humiliating measures, including thousands of layoffs of civil service workers and cuts to the minimum wage, imposed by countries suspicious of Greece’s reform efforts after two years of what they called the country’s broken promises.
The finance ministers wrangled until the early morning over the details of the rescue, squeezing last-minute concessions out of private holders of Greek debt who agreed to lose 53.5 percent of the face value of their investment to avoid even more severe losses if Greece fails to pay euro14.5 billion in debt due March 20.
The serious risks of the bailout’s failure include the likelihood that Greece’s economy remains in a deep recession instead of returning to growth in 2013 as the deal assumes. That would undermine chances of paying even the reduced debt load, estimated at a still-high 120 percent of annual economic output in 2020, down from 160 percent now.
Additionally, political outrage over the cutbacks could lead Greece politicians to balk at the tough conditions. That could push rescuer countries – led by Germany – to cut off further funding.
Elections in Greece are expected in April. The leaders of the two main parties have committed to the cuts and reform program, but anti-bailout parties have been gaining in the polls.
Greece’s economy shrank 7 percent in the fourth quarter of last year and unemployment is 19 percent, a consequence of cuts in public wages and increased taxes inflicted during a downturn.
If that keeps up, even the rescuers acknowledge the reduction goal of 120 percent of GDP is long gone.
“The risks are clearly on the downside,” said Diego Iscaro, an economist at IHS Global Insight. “By austerity alone, Greece will not solve the problems it has at the moment. We don’t know when the economy will return to growth and how it will grow.”
Greek politicians nevertheless greeted the package as a turning point for their battered country.
“It’s no exaggeration to say that today is a historic day for the Greek economy,” said Greek Premier Lucas Papademos.
The deal helped bring the Dow industrial average over 13,000 on Tuesday for the first time since May 2008, powered by optimism that economic recovery was on the way. It finished up 15.82 points at 12,965.69.
In Washington, White House spokesman Jay Carney said President Barack Obama called German Chancellor Angela Merkel to thank her for her leadership in helping secure the eurozone agreement. But Carney said European countries need to do more to stave off further crises, including strengthening financial firewalls to prevent one nation’s troubles from spreading across the continent.
Including Greece’s first bailout worth euro110 billion the new deal means every Greek man, woman and child will owe the eurozone and the IMF about euro22,000 ($29,000).
Greece agreed to cut spending and wages, and to permit outsiders to supervise its finances through European Union and IMF officials stationed in Greece. The rescuers also demanded a separate account for the aid money and legal guarantees that creditors get paid before teachers, doctors and police do.
The agreement assumes that banks and investors owed money by Greece will take new bonds that reduce their holdings by more than half.
Even if it later balks at the bailout conditions, Greece would have difficulty writing down the new debt it issued to private bondholders, who demanded stronger legal protections. Official creditors – the IMF, the eurozone countries and the European Central Bank – would also have difficulty accepting more writedowns.
Inability to pay – or unwillingness to accept the harsh conditions – could lead to a non-negotiated “hard” default that could end in Greece leaving the euro.
On top of the new rescue loans, Athens will also ask banks and other investment funds to forgive it some euro107 billion ($142 billion) in debt, while the European Central Bank and national central banks in the eurozone will forgo profits on their holdings.
The deal “closes the door to an uncontrolled default that would be chaos for Greece and Greek people,” said European Commission President Jose Manuel Barroso.
Despite those unprecedented efforts, Greece is at the very best starting on a long and painful road to recovery.
It is being pushed to make its economy more business-friendly and productive by opening access to closed trades and professions; halting rampant tax evasion; allowing more flexibility in wage bargaining between companies and unions; simplifying starting a business; and cutting its bureaucracy.
“It’s not an easy (program), it’s an ambitious one,” said Christine Lagarde, the head of the IMF.
For the private debtholders who Greece owes money to, the bond swap will lop euro107 billion off Greece’s euro352 billion load. On top of that, investors will be asked to give Athens 30 years to repay them, compared with just under 7 years.
Average interest rates would fall to 3.65 percent from around 4.8 percent.
Overall losses for private bondholders would be above 70 percent when accounting for the new bonds’ longer repayment period and lower interest rate.
Private investors weren’t the only ones having to give ground. The eurozone countries will reduce the interest that Greece has to pay for its first package of bailout loans to 1.5 percentage points over market rates from between 2 percentage points to 3 percentage points currently.
At the same time, the European Central Bank and the national central banks in the countries that use the euro will forgo profits on their Greek debt holdings, again reducing the costs for Greece.
Several hurdles remain before Greece will see any of the money or other benefits of the new program.
Apart from the implementation of more than 30 different savings and reform measures by Greece, the new bailout has to be debated by parliaments in several member states, including Germany, the Netherlands and Finland.
The IMF also still has to decide how much of the euro130 billion bill it is willing to stump up. The Washington-based fund had indicated its contribution will be lower than the one-third of the total it has provided in previous bailouts.
Lagarde, the IMF chief, said the fund’s board would decide on its contribution in mid-March. It will consider the whole program, “but also additional matters such as the proper setting up of a decent firewall,” she said.
The overall ceiling for eurozone rescue loans has been set at euro500 billion ($663 billion), much of which has already been committed to Ireland, Portugal and now Greece.
Euro leaders will decide at their summit in early March whether that ceiling should be increased.
It will also take some time to see how many private creditors will participate in the debt relief and how many will have to be forced to sign up through new legal clauses. The representatives of the private bondholders said they were confident that investors would find the deal attractive, but some analysts fear that imposing losses on even some bondholders may destabilize markets.
McHugh reported from Frankfurt, Germany. Derek Gatopoulos and Elena Becatoros in Athens, Greece, Sarah di Lorenzo and Don Melvin in Brussels and AP Business Writer Paul Wiseman in Washington contributed to this report.