Greece, struggling to seal agreement on a second rescue from creditors in coming days, will remain at risk abandoning the euro, say economists including Holger Schmieding of Berenberg Bank.
Greece may stay saddled with too much debt, too little economic growth and too large a budget hole to do without yet more aid that euro nations led by Germany are increasingly reluctant to offer.
Deeper spending cuts required for extra loans of at least 130 billion euros ($170 billion) and domestic resistance to overhauling the economy risk limiting the impact of any second aid package, the economists say. The deal is also slated to include a 50 percent cut in the face value of more than 200 billion euros of Greek debt through a voluntary exchange by private creditors of outstanding bonds for new securities.
“Greece is in deep trouble,” Schmieding, chief economist at Berenberg in London, said in a Jan. 30 report. “The current Greek adjustment program is failing. Excessive austerity, a lack of supply-side reforms, administrative incompetence and political deadlock have pushed the Greek economy into an apparent death spiral. More of the same will not work.”
Greece remains in intensive care more than two years after triggering Europe’s debt crisis, testing the patience of other European Union nations. Last November, when discussing the Greek situation, French President Nicolas Sarkozy and German Chancellor Angela Merkel for the first time raised the prospect of a country’s exit from the euro.
Failure to control Greece’s troubles helped to push Ireland and Portugal into rescue programs, to raise borrowing costs for Italy and Spain, to embroil the European Central Bank in a controversial program of sovereign-bond purchases and to prompt Standard & Poor’s to strip France of its top credit rating.
While Merkel says Greece hasn’t “succeeded in stabilizing the situation,” she has pushed for closer political and fiscal union to solve the financial crisis and keep the euro whole. “Our intention is that no country must leave the euro area,” Merkel told reporters Jan. 9.
Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute. The country is in its fifth year of recession, with a budget deficit still close to 10 percent of gross domestic product and unemployment of around 18 percent.
Facing a 14.5 billion-euro bond payment on March 20 and general elections as soon as April, the caretaker government of Premier Lucas Papademos must heed familiar calls by the euro area and International Monetary Fund for tighter austerity in order to complete the talks on a second aid package. The demands are also for lower wage costs and the deregulation of professions including lawyers and truck drivers.
“We’re a bit concerned that Greece will not be willing to deliver in time,” German Deputy Finance Minister Steffen Kampeter said in a Bloomberg Television interview broadcast on Feb. 1. “You only get solidarity when you offer solidity and solidity means reforms in Greece and fiscal consolidation.”
Greece will default on its debt and is likely to leave the euro, Nobel economics laureate Paul Krugman said today at a conference in Moscow.
“The Greek situation is essentially impossible,” Krugman said. “They will default on their debt. In fact they already have. The question is whether they will also leave the euro, which I think at this point is more likely than not.”
Berenberg’s Schmieding said that Greece’s ability to stay in the euro is “very open to question” and that the euro area and IMF need to focus less on austerity and more on improvements to the business environment. Greece, he said, needs a simple flat tax, cuts in red tape and more deregulation.
The planned voluntary debt swap is meant to help Greece reduce its debt to 120 percent of GDP in 2020. That’s still more than any of the other 16 euro countries have now.
Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the swap being negotiated, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet. The loss in net present value will exceed 70 percent, Greek Finance Minister Evangelos Venizelos said Jan. 31.
Michael Massourakis, chief economist at Alpha Bank SA in Athens, said a successful debt swap must be accompanied by measures to bolster growth.
“I think then we are into a situation where, with the gradual improvement from the supply side of the economy, we are moving into a better growth profile,” he said in a Jan. 30 Bloomberg Television interview.
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