After a marathon 13 hours of discussion, the European Union decided to proceed with a $172 billion bailout package for Greece, hopefully staving off its impending March default. The Prime Minister of Greece, Evangelos Venizelos, called it “maybe the most important deal in Greece’s post-war history.”
Others saw less reason for optimism, as Reuters reports:
The austerity measures imposed on Athens are widely disliked among the population and will put pressure on politicians who must contest an election expected in April.
Further street unrest could test politicians’ commitment to cuts in wages, pensions and jobs. Greece’s two biggest labor unions called a protest in Athens on Wednesday.
An opinion poll taken just before the Brussels deal showed that support for the two mainstream parties backing the rescue had fallen to an all-time low while leftist, anti-bailout parties showed gains.
Anastasis Chrisopoulos, a 31-year-old Athens taxi driver, saw no reason to cheer the deal.
“So what?” he asked. “Things will only get worse. We have reached a point where we’re trying to figure out how to survive just the next day, let alone the next 10 days, the next month, the next year.”
As Reuters explains, “next to nothing will go directly to help the Greek economy.” The bailout is all about recapitalizing Greek banks and controlling their immense public debt, in what boils down to waving a magic wand and making a big chunk of it disappear. Private bondholders will be made to eat a 53.5 percent loss on the nominal value of their bonds, enforced through legislation.
Once again, insolvent government survives by looting the private sector. Will the signal this sends to bond buyers around the world make it more difficult for spendthrift nations to finance their debt in the future? The supply of suckers willing to risk massive compulsory “haircuts” cannot be unlimited.
In exchange, Greece will have to work on implementing those hated “austerity measures,” which will be closely monitored by the Eurozone, as reported by the Associated Press:
EU economic affairs commissioner Olli Rehn says Greece’s new compliance with the terms of a new bailout will be ensured by a separate account containing enough money service its debt for three months.
That close monitoring was demanded by some members of the eurozone who are frustrated that Greece has not always enacted painful reforms and budget cuts on time.
So there’s still a very good chance the Greeks will simply vote in a new government willing to renege on this deal, with only the danger of losing the money in that isolated bailout account to restrain them.
The purpose of the bailout program is to bring Greek debt down to 120.5 percent of GDP by 2020, which is “around the maximum that the International Monetary Fund and the Eurozone consider sustainable.” The ability of the Greek economy to sustain even that reduced debt level is debatable.
Meanwhile, the President of the United States just dropped a budget proposal that would see our debt-to-GDP ratio hit 110 percent by the end of next year. If the more pessimistic projections of GDP growth hold up, we could well be catching up to Greece by 2020, if not sooner.