Between Lots of Rocks and Hard Places: Greece's Bad Options

by Joanna Kakissis

Time
February 7, 2012

The leaders of the three parties in Greece's coalition government are expected to sign off on new tough new austerity measures on Tuesday, including a controversial reduction in the minimum wage, in exchange for about $171 billion in new bailout loans. If the leaders sign, then a separate bond-swap deal with private creditors to cut Greek by at least 50% will also come through.

But Greek politicians, already hated by the public for agreeing to earlier austerity measures, are actually faced with two disastrous choices: Sign the deal and face the wrath of anti-austerity voters in spring elections; don't sign and send the country into a chaotic default, which could lead to a exit from the eurozone.

International lenders — who include the European Union, the European Central Bank and the International Monetary Fund — are just as despondent. Eurozone leaders say they've lost patience with the Greek delays, but they're also trying to process the likelihood that austerity may be backfiring on everyone. Austerity was supposed to bring down debt levels in Greece, as well as Portugal and Ireland, to sustainable levels but instead it's increased in all three countries. Greece's debt level is especially troubling: it rose to 159.1% of gross domestic product, according to Eurostat, the EU's statistical agency. That makes the IMF's goal of reducing Athens' debt to 120% of GDP by 2020 seem out of reach, analysts say. It is almost like Herakles and the hydra: lop one problem off and more grow in its place.

"There is now broad agreement among eurozone donors and the IMF that Greece will not be able to squeeze more revenue out of an economy that is in its fourth year of recession," wrote Katinka Barysch, deputy director of the London-based Centre for European Reform in a recent assessment. Added Paul McNamara, investment director at GAM, an asset management firm in London: "Greece is in a horrible position because it was already a terribly uncompetitive economy."

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