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Greece still on knife’s edge, but key deals struck

IT WAS a tough February for Greece, as time ran out for the debt-ridden country to secure cash in order to pay its debt maturing in March. Athens came under immense international pressure to come to terms with its difficult position if it wanted to avoid a messy default and a possible exit from the euro area.

IT WAS a tough February for Greece, as time ran out for the debt-ridden country to secure cash in order to pay its debt maturing in March. Athens came under immense international pressure to come to terms with its difficult position if it wanted to avoid a messy default and a possible exit from the euro area.

After months of deadlock, things have finally moved forward during the past few weeks. The 17-nation eurozone, fearing the debt contagion that could possibly be triggered by Greece’s uncontrolled collapse, had to stick to its guns and urge Greek policymakers to get down to painful austerity.

Given that much was at stake for the whole single-currency region, Greek politicians had to yield to the demands of the international creditors who were prepared to provide the country with a €130-billion rescue package from which Athens could use €14.5 billion to make debt repayments in mid March.

Greece, after years in recession and months of exclusion from the markets, currently has extremely limited opportunity to borrow from investors. The country is unable to acquire cash on a long-term basis, with short-term T-bills remaining the only tool it can use to borrow on the markets. This is because investors calculate there is a 94-percent chance that Greece will default within five years.
The economy of Greece has been shrinking since late 2008, showing an annual decline of 7 percent in the fourth quarter of last year, according to non-seasonally adjusted figures issued by the country’s statistics office, ELSTAT, on February 14.

Revised quarterly estimates for the first three quarters of 2011, based on updated general government accounts compiled at the end of December, reveal a GDP decline of 8 percent in the first quarter of the year, followed by contractions of 7.3 percent and 5 percent in the second and third quarters respectively.

Forecasts for this year aren’t exactly rosy either. The European Commission said on February 23 it expects a 4.4-percent contraction in Greece’s gross domestic product in 2012, correcting its previous estimate of a 2.8-percent fall.

The Organisation for Economic Co-operation and Development (OECD) also predicts a further GDP contraction this year, but says that Greece’s output is projected to begin to rise in 2013, driven by wide-ranging structural reforms which the country has pledged to launch.

The cash injection from the "troika" of lenders – the European Commission, the European Central Bank and the International Monetary Fund – was promised on condition that Greece, seen as dithering when it came to the implementation of reforms, would introduce minimum wage cuts, axe holiday bonuses and fire public sector workers.

European political leaders, including German Chancellor Angela Merkel and French President Nicolas Sarkozy, turned up the heat on February 6, saying Europe wanted the deal and Greece needed to act swiftly to strike it.

Following a series of overnight talks that dragged on for weeks, seemed to bear no fruit and were viewed by many as a ‘never-ending’ story, Greek Prime Minister Lucas Papademos announced on February 10 that Greece’s political leaders had agreed on budget, wage and pension cuts.

This moved the euro bloc to the point where the new bailout could be approved, but eurozone finance ministers demanded that the Greek Parliament first pass the measures before they signed off on the deal.

Parliamentary ratification of the spending cuts, worth €3.2 billion, came on the last day of February, with Greek lawmakers passing the bill in a vote that saw 202 out of 300 MPs saying ‘yea’, while 80 voted against and the rest did not vote or abstained.

A massive wave of protests erupted across Greece after Papademos said the country would enter another age of austerity in order to reduce its debts. Alarmed by the prospect of budget cuts, Greece's trade unions called a 24-hour strike in protest against the new policies. Moreover, the demonstrations turned into riots, and violence was seen in the streets of Athens.

Protesting Greeks see the austerity, the first round of which came in 2010 under the first bailout, as driving the economy into a downward spiral. The country’s jobless rate has been surging recently, standing at 20.9 percent in November, up from October’s 18.2 percent and more than doubling since 2008, when it was comfortably under 10 percent.

The newly-approved measures will feature a cut in the minimum wage by 22 percent to €585 gross (and see 32 percent of workers aged 25 and under lose their jobs). Pension cuts will include 12 percent off amounts exceeding €1,300 for those receiving pensions from the state as well as pension bonuses higher than €200 monthly. The wages for all state employees will be lowered, including a 10-percent cut for the police and for fire department employees.

Greek Finance Minister Evangelos Venizelos said during the debate in parliament that the cuts are “dramatic” but necessary. “If we do not start to produce a surplus (before we pay debts and interest rates) next year, the situation will be catastrophic,” he warned.

But bailout cashflow is just one side of the Greek story, as it largely serves only to repay old debts. In order to get on track towards sustainable debt loads in future, the country rushed to nail an agreement with private lenders holding Greek bonds to write down €107 billion of the debt, a move without which Athens would be heading for a disorderly default.

Greece’s debts have mounted, to reach 160 percent of its economic output, and policymakers in Athens now believe that the ‘haircut’, in combination with austerity and structural reforms, could squeeze the debt level to around 120 percent of the nation’s GDP by 2020. The deal with private lenders features a bond swap that will radically cut the value of their bond holdings.

The ‘haircut’ move led the rating agency Standard & Poor’s to downgrade Greece even further from its low ratings CC- (long-term) and C (short-term), sending the debt-laden country into selective-default territory on February 28.

While Greece was making progress in taking steps necessary to stave off the threat of a chaotic default, some voices have been raised suggesting that Greece should exit the euro area once the troubled waters in the region have calmed and the threat of poisoning other struggling economies (namely Portugal, Spain and Italy) is averted.

The voices calling for a Greek exit were heard mainly in Germany, Europe’s biggest economy and the chief paymaster contributing most to the region’s temporary bailout fund, the European Financial Stability Facility (EFSF). This is despite the fact that Angela Merkel said in early February that Greece should not be expelled from the eurozone. "We want Greece to stay in the euro," she told reporters.

However, she suffered a surprisingly cold shower from her own party colleagues later on, when 17 members of her Christian Democratic Union (CDU) voted on February 27 against bailing out Greece. A coalition led by Merkel’s party enjoys a majority in the German parliament, but the vote ended with only a slim victory along party lines for the chancellor.

In addition, Merkel faced opponents on the issue within her own cabinet. Interior Minister Hans Peter Friedrich from the Christian Social Union of Bavaria (CSU), the sister party of Merkel’s CDU, called for a “voluntary exit” by Greece from the eurozone.

“I am not talking about forcing Greece to leave the eurozone, but creating incentives for an exit which it cannot refuse,” he said. Some other members of the German government followed Friedrich's lead, including Economy Minister Philipp Rösler.

The author works for WBP Online

Topic: Finances and Advisory


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