Greece secures new bailout, but recovery still in doubt
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Eurozone finance ministers have approved a new EUR130-billion bailout package for Greece. While the fund allows the country to meet debt payments next month, analysts say the threat of Greek bankruptcy remains.
Eurozone finance ministers hammered out a second major bailout deal for Greece on Tuesday, reaching an agreement on a 130-billion-euro package for the debt-ridden country. The rescue deal eased fears of an imminent Greek default on existing loans and minimised the risk of contagion in the single-currency zone, but provided no assurances that Greece would not face bankruptcy further down the road.
Late on Tuesday night, and after 13 hours of talks, European ministers approved the mammoth bailout package that allows Athens to avoid default next month. The key provision of the deal allows Greece to launch a bond swap with private investors that should more than halve its privately-held debt.
“We're very happy,” Greek Prime Minister Lucas Papademos said after the marathon negotiations in Brussels that saw him shuttle between EU finance chiefs and negotiators representing banks. Papademos acknowledged that full delivery of the package hinged on Greece compliance with a string of conditions in “a timely and effective manner.”
“This deal is coming with very strong strings attached. Greece will now be put under very strict surveillance,” said FRANCE 24 journalist Frederic Simon by phone from Brussels. “A mechanism is being put in place to monitor each and every installment which is going to be disbursed under this new programme."
“Effectively this means Greece is being placed under some sort of international trusteeship. This is the price that Athens has to pay to avoid bankruptcy,” Simon said.
Forcing down medicine
Before any money in the emergency 130-billion-euro fund is released, Greece must enact around 30 reforms and spending cuts worth about 3 billion euros – all commitments the country’s leadership previously made but has yet to enact.
The deeply unpopular austerity programme meant slashing government spending and increasing taxes. The pledges included a 22-percent cut in the country's minimum wage, a 12 percent reduction to pensions of more than 1,300 euros a month, and 15,000 public sector layoffs.
Many analysts, like Pascal de Lima, an economist at the Science Po University in Paris, thought that the deal was necessary but offered little hope of avoiding a later crisis. “It’s both a last ditch deal and a bailout that is condemned to be insufficient… even if it’s an important package it only artificially maintains Greece above water. Without growth, Athens has no chance of balancing its accounts and the debt is bound to remain high.”
Condemning what it called "the grave of Greek society", unions unleashed a massive 48-hour strike on February 10 and 11. Protestors descended on Syntagma Square, which was once more the scene of violent demonstrations against the government’s measures. On Sunday, protesters once again clashed with police in Athens.
In the atmosphere of social tension and violence, questions have surfaced about Greece’s ability to stick to its latest austerity commitments after general elections scheduled for April. Sceptics wonder how a new government in Athens could uphold the widely hated belt-tightening.
Greek PM Papademos tried to address those fears on Tuesday, telling reporters: “I'm convinced that the government after [an April general] election will also be committed to implementing the programme fully... because it is in the interests of the Greek people.”
The euro initially jumped over half a cent against the US dollar to a two-week high on news of the deal, but few analysts were ready to say the new package would end Greece’s problems. Official figures last week said Greece’s economy shrank 7 percent year-on-year in the last quarter of 2011. The results were worse-than-expected, with the planned cuts likely to further impede growth.
The vast majority of the 130-billion-euro bailout is slated to finance and encourage the bond swap with private creditors and shore up Greece’s banking system. In contrast, next to nothing will go directly to help the Greek economy.
“Greece certainly needs to get its debts back in order, but the austerity measures are inefficient during a period of recession,” warned Science Po’s Lima. “It’s a vicious circle that is only going to lead to an increase of total debt. The issue of an eventual Greek bankruptcy will no doubt resurface.”
Doubts also persisted in view of the failure of Greece’s 110-billion-euro bailout deal approved nearly two years ago. While Greek ministers and EU officials hailed the new agreement as an eleventh-hour lifeline, experts pointed out that Greece was already in a de facto position of bankruptcy.
“Let’s not forget that private creditors have accepted to write off 100 billion euros from the 200 billion euros in debt they are holding… it is for all intents and purposes a payment default,” Lima said. “But looking Greece’s bankruptcy straight in the face means asking the difficult question if Greece can be allowed to stay in the European Union.”