Economist
February 11, 2012
Taking big decisions on Greece’s future suggests high drama. But the delays, muddle and political posturing dogging efforts to win a €130 billion ($170 billion) bail-out from its European Union partners could be from an old Athenian comedy. This week the three political leaders supporting a fractious government were arguing over the details of an austerity package with Lucas Papademos, the caretaker prime minister. Their meeting was repeatedly delayed as the “troika” (the European Commission, the European Central Bank and the IMF) grappled with Evangelos Venizelos, the finance minister, over €3 billion of spending cuts.
Foot-dragging over reform is a big reason for Greece’s sick state. The economy may shrink this year by around 3%, after 6% last year. Unemployment hit 19% in January. Almost one in two young Greeks is without a job. Given the outlook, investors have unsurprisingly shied away from new privatisations. Delays by finance-ministry officials have also infuriated the troika. Only after it had dismissed their latest proposals as “unrealistic” and “farcical” did Mr Venizelos cave in. A 20% reduction in the minimum wage, another round of pension cuts and 15,000 public-sector job cuts are among the measures the politicians are being asked to swallow in the next 15 days.
Once the deal is done, Greece can arrange a “voluntary” debt swap, in which private owners of Greek bonds would write off 70% of their value, but could eventually recoup a chunk if the economy recovers. The debt would be reduced by €100 billion (from €350 billion) but would still be 120% of GDP in 2020 (from 160% now). Greece might one day be able to pay back the full amount, argue the project’s backers, though many are sceptical that a full-scale default can be avoided.
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