Greece has narrowly escaped the possibility of bankruptcy this spring, when it faces the repayment of €14.5 billion of debt. The reprieve comes from an agreement on a new bailout package reached Tuesday.
While the agreement is conditional on successful private debt restructuring and the approval of a number of EU parliaments, Greece can now afford to take a breath of relief.
Or can it?
According to IHS Global Insight economists Diego Iscaro and Blanka Kolenikova, the deal only scratches the surface of the enduring problems faced by the country. Despite the fact that lower interest rates on official loans will help to improve Greece’s debt sustainability, they remain unconvinced.
Even the valiant efforts of the European Central Bank fail to impress the IHS economists. The ECB has announced plans to distribute profits derived from Greek bonds to national central banks, which will then give the money to their respective governments to reinforce Greece’s aid package. While this will put Greece in a stronger negotiating position with private bondholders, it will not be enough according to both analysts.
They question whether enough private investors will agree to take part in the debt restructuring due to the fact that hedge funds and other independent investors hold a relatively large share of the private debt being negotiated. Recent reports have even suggested that Greek parliament will have to force investors’ hands by legislating private bondholders to take losses.
“[This action] will put a further question mark on the ‘voluntary’ nature of the debt exchange, risking triggering credit default contracts,” according to Iscaro and Kolenikova. “The second bail-out means that the proportion of Greek debt held by official institutions will increase, making it difficult for Greece to attract new investors when it eventually decides to issue new long-term debt.”
The main problem, however, is that after years of economic contraction, the Eurozone doesn’t grasp that Greece’s problems will not be solved without a solid growth strategy. The economy is immersed in an “austerity trap” where fiscal austerity and a deep recession reinforce each other.
In addition, the unemployment rate has more than doubled in less than four years, with 50% of Greeks between the ages of 15 and 24 currently out of work. Tax revenues for 2011 also fell despite the placement of severe austerity measures.
Iscaro and Kolenikova believe that Greece needs to face major structural reforms to achieve sustainable growth rates in the long term and to remain in the Eurozone.
Greece will struggle and as a result, tensions will re-emerge every time the country has to secure a new tranche of official funds. More troubling, perhaps, is the fact that the longer the economy stays in dire straits, the more likely social and political support for reforms is eroded.
The country’s efforts could be derailed by the parliamentary election scheduled for April, as support for the two main parties—centre-left Panhellenic Socialist Movement (PASOK) and conservative New Democracy (ND)—is at a historic low, with the two parties polling around 13% and 19%, respectively.
Parties opposed to the foreign-imposed austerity are swiftly gaining support among public. If neither of the main parties secures sufficient support, the winning party would be forced to team up with the more radical parties, resulting in uncertainty and instability mid-term.
The government is also coping with mounting public opposition to the austerity measures, Iscaro and Kolenikova point out, which may peak in coming weeks as a result of the Greek MPs move to approve the bailout deal and start implementing recently passed cost-cutting measures.
Earlier this month, riots already flared up in the capital and in other Greek cities, with thousands joining the protest rally against the austerity package required for the current bail-out deal to be approved.
A report penned by Desjardins vice-president and chief economist François Dupuis, and senior director and deputy chief economist Yves St-Maurice, says a Greek default is “a sure thing”—either the nation won’t be able to make repayment, or the bailout will only allow them to continue operating for a limited amount of time.
“The possibility of recession in the euro zone seems to be firming up,” due to the drop in the region’s fourth quarter GDP. In 2012, they anticipate a 0.6% decline in the eurozone’s real GDP after minor growth. In addition, the United Kingdom will face growth stuck at 0.2%, international trade will suffer, and the emerging countries, for which a large proportion of growth comes from exports, will have to face these headwinds.