Back from the brink

THIS WEEKEND in Athens may have seen the opening of the final scene in the last act of a modern Greek tragedy; the drama ending…

THIS WEEKEND in Athens may have seen the opening of the final scene in the last act of a modern Greek tragedy; the drama ending with a reluctant Greece accepting the tough austerity terms attached to a €130 billion rescue package which the EU, IMF, ECB troika will soon sanction.

The alternative is an appalling financial vista: the grim spectre of national insolvency within weeks. Failure by Greece to accept the financial aid that the international lenders have offered would leave the government unable to refinance €14.5 billion in sovereign bond repayments due next month.

For Greece, the political and economic fallout from a default could involve the country leaving the euro and, quite possibly, the EU. A sovereign debt default however managed – whether orderly or not – would prove disastrous for Greece, damaging for the euro zone, and lower Ireland’s prospects of economic recovery, as fear of financial contagion spread both to Ireland and to other debt-laden peripheral economies.

In contrast, Greece’s acceptance and the troika’s subsequent approval of the bailout package later this week would have a beneficial effect, not least for Ireland. It would raise international confidence in the euro and remove some financial uncertainty which should help to accelerate the pace of national economic recovery. It would also strengthen the Government’s negotiating position in securing a restructuring of the €30.6 billion promissory note payments, the onerous price paid to rescue Anglo Irish Bank. Germany’s finance minister, Wolfgang Schauble, last week indicated that his government was ready to facilitate an adjustment to the terms of Portugal’s bailout programme, after a “substantial decision” was taken on Greece.

The previous €110 billion bailout for Greece in early 2010 has failed, in part because the terms of that agreement were neither properly implemented nor fully honoured by the Greek government. The Greek economy has been in recession for five years. Last year, it contracted by 6 per cent of GDP, and this year economic activity is likely to shrink by a further 3 per cent. Its unemployment rate is 21 per cent and rising, and its national debt has soared to 163 per cent of GDP. A central aim of the second rescue package for Greece is to restore its debt level to 120 per cent of GDP by the year 2020, a target unlikely to be achieved without further funding by the international lenders, or more debt writedowns.

The key question that has not been answered in the loan negotiations with Greece is how to generate sustainable long-term growth from further austerity measures that already have depressed demand and tax revenues, and raised unemployment levels. How to shrink an economy into growth in a country without a real industrial base and that – unlike Ireland – has a limited capacity for export-led growth, has yet to be demonstrated. The risk remains that the radical fiscal surgery now proposed – however well intentioned – kills, rather than cures, the Greek patient.