Second rescue means bleak prospects and much austerity
The new Greek bailout deal is done, after seven months of talking. ARTHUR BEESLEYasks if it will work
ALMOST TWO years after its unsuccessful first bailout, Greece has secured a second EU-International Monetary Fund (IMF) rescue deal. The new plan means Athens will probably avoid an uncontrolled default next month, but years of austerity lie ahead for Greeks and their political leaders.
When the first €110 billion bailout was agreed in May 2010, the European authorities worked on the basis Greece would be able to make its return to debt markets this year. While it has been clear for a year or more that this was not going to be possible, the negotiation of the deal itself took fully seven months.
The new rescue assumes the country will not regain access to private financing until 2014, the same year as its stricken economy is forecast to start growing modestly again after a deep recession. That is also the year in which Greece is forecast to achieve a budget surplus before debt-servicing costs.
Even if all goes to plan, however, Greece will not attain a debt level of some 120 per cent of national output until 2020. This is the quantum deemed “sustainable” by the IMF and Europe, but still amounts to twice the EU’s legal limit. It is certain that such a reduction would represent a great leap forward from the present “unsustainable” debt level of some 160 per cent of gross domestic product (GDP).
To say the least, the nine-year recovery path is long and risky. At all times, it will be subject to the unreliable vicissitudes of politics and economics within Greece and far beyond. For years and years, more than a little good luck will be required.
After all, the EU-IMF “troika” warns in a widely leaked report that the new rescue may remain “accident-prone”, with questions lingering over debt sustainability. “A scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatisation implementation),” it says.
“This would result in a much higher debt trajectory, leaving debt as high as 160 per cent of GDP in 2020.” In this disheartening scenario, Greece would undergo many years of pain in the second bailout, only to see its debt stuck at the original starting point.
Still, European officials insist the new rescue programme has greater potential for success than its discredited predecessor.
The former foundered on the broken promises of Greek leaders and a deeper-than-expected recession. The latest endeavour comes with tougher monitoring by external inspectors permanently based in Athens to clamp down on tax evasion and ensure difficult administrative reforms are actually made. Greece must also give priority in its constitution to debt-servicing payments, while funds for that purpose will go into a “segregated” or escrow account.
The overriding objective behind these intrusive initiatives is to leave Greek leaders without scope to waver on their bailout commitments. This reflects Europe’s frustration at the failure of the Greek political class generally to execute promised reforms, anxiety about the outcome of an election due in April and concern that the onerous recovery plan will meet yet more resistance on the street.
A further concern must be to establish the credibility of the plan with the outside world.
Although the new bailout comes with the hard-won fillip of an anticipated €107 billion debt write-down by private bondholders, this voluntary initiative depends on the co-operation of the creditors themselves. The same goes for the promise of indirect contributions to the bailout from the European Central Bank and national central banks.
If any of these protagonists failed to sign up, the very edifice of the new bailout could implode. It is in their interest, of course, to avoid the uncontrolled default which might follow.
For Greece to gain the confidence and cash of its sponsors, political leaders must carry out a series of arduous tasks which they would rather shirk and have avoided for years.
The country’s pension system was reformed in 2010, but European officials say the full benefit will not be seen for some years to come. The new bailout demands yet another wave of pension cuts, while Greece will be obliged to continue cutting private sector pay even after the return to growth.
Job cuts in the public sector will continue this year and for another three years, with the total number of defunct posts reaching 150,000 between 2010 and 2015. Although this remains deeply contentious in Greece, European officials say most of the cuts can be achieved by not replacing older staff as they retire.
Given the emphasis on improving tax collection, the same officials say the new bailout does include tax increases per se. The impact will be the same, however, for any evaders caught.
Similarly, the plan foresees a large-scale deregulation of state-protected professions and trades in Greece. This heralds trouble for well-paid lawyers and engineers. It doesn’t stop there, however. The rules governing hairdressers and comparable jobs are set to be relaxed.
All told, it is a monumental task. The inherent frailty of the Greek state and the fleeting nature of long-range economic forecasting only add to the difficulty.