The seemingly never-ending Greek drama raged on in recent weeks, as the beleaguered nation edged ever closer to the financial abyss. A string of broken promises and missed targets looked set to end in default but, after seven months of intense political wrangling, efforts to complete the country’s second international bail-out in two years, look set to bear fruit, just weeks before the government is scheduled to meet a €14.4bn bond payment on 20 March.
The ultimate Greek outcome has been balanced on a knife-edge for some time now, but the weekend’s disclosure by the Prime Minister, Lucas Papademos, that the government has identified “a series of additional measures amounting to 125 million euros in order to complete the package of budget cuts worth 325 million euros,” should pave the way for a deal that unlocks the €130 billion aid package.
Financial markets are confident that once the latest bail-out deal is secured, it will soon be followed by a voluntary private-sector debt bond swap and, perhaps even a willingness on the part of national central banks to participate in the private exchange by accepting losses on Greek bonds in their portfolios. However, even if actual events transpire as hoped, it is far from clear whether the sick patient will be any closer to discharge from intensive care, let alone on the road to recovery.
The Greek economy has already endured four consecutive years of recession that has seen real GDP drop by more than 13 per cent since the end of 2007. The near-depression conditions have sparked a surge in unemployment with the jobless rate rising to 21 per cent in November of 2011 – a seven percentage point increase year-on-year and 13 ½ percentage points higher than the early-summer of 2008. The toll on young workers has been particularly pronounced with the unemployment rate for people under the age of 25 reaching 48 per cent towards the end of last year.
Against this background, it’s not altogether surprising that riots and violent demonstrations have become a regular occurrence in Athens and other cities in recent months while, civil servants increasingly refuse to implement austerity measures. The increased social tension is not difficult to understand and Greek Public Order Minister, Christos Papoutsis recently warned that, “The government is making superhuman efforts and we have reached the limits of the social and economic system.”
More economic hardship is set to follow however, as the new bail-out plan anticipates a further contraction of five per cent during the current calendar year to bring the cumulative decline to an eye-popping 17 ½ per cent of GDP. The moribund economy will only add to the labour market’s woes as too will the elimination of 1,500 public sector jobs – as part of the commitment to reduce government payrolls by 150,000 by 2015.
The plan envisages a return to growth next year, but the projections appear far too optimistic in light of the mounting evidence that suggests that the austere policies are just not working and ultimately self-defeating. Indeed, economic activity continues to disappoint and as a result, tax revenues keep on falling well short of plan.
The latest available hardly inspires confidence that a new bail-out will proceed according to plan. Indeed, Greek GDP declined at a worse-than-expected annualised rate of seven per cent in last year’s fourth quarter. Meanwhile, budget revenues dropped seven per cent year-on-year, of which VAT receipts declined almost 19 per cent, as against plans for an increase in both cases.
Further, questions remain as to how committed any new government will be to the new plan following elections in April. Recent opinion polls indicate that the three hard-left parties could capture a combined 43 per cent share of the vote or four percentage points more than the combined support for New Democracy and PASOK and, the absence of a majority in Parliament could well impede expedient implementation of the new plan.
Even in the unlikely event that the austerity programme proceeds according to plan, official projections reveal that Greece can still expect to have a public debt to GDP ratio close to 130 per cent in 2020 or more than double the Maastricht criteria. Additionally, the country continues to run a large current account deficit that is unlikely to disappear over the forecast horizon, which means that the already large level of net foreign debt will continue to rise and leave the beleaguered economy vulnerable to a sudden stop in external financing.
Financial markets seem confident that a line will soon be drawn under the ongoing Greek debt crisis. Reality however, suggests that the situation will remain volatile as the troubled sovereign lives from one tranche of bail-out funds to the next, with speculation of a disorderly default mounting every time a review ahead of the release of funds nears. It’s Groundhog Day in Greece!