Sunday, 2 May 2010

Greek bailout comes with painful measures

The Greek government has announced that it is undertaking a new round of painful cost-cutting and restructuring measures in response to a three-year bailout jointly sponsored by the European Union and International Monetary Fund.

The prime minister and finance minister made the announcement on Sunday morning after securing a three-year financial safety net amounting to 110 billion euros.

They are billing the joint EU-IMF bailout as the biggest in history, and in response have launched what Finance Minister Yiorgos Papakonstantinou called the most ambitious fiscal adjustment ever undertaken by a European country. The gambit is to eradicate a 30bn euro deficit over the next three years – no small feat for an economy like Greece’s, now over 300 billion euros in debt.

The government will raise consumer taxes and reduce public sector salaries for the second time this year. Easter, summer and Christmas bonuses, normally amounting to two extra salaries, are being reduced to flat payments totalling 1,000 euros. Above salary benefits, already cut by 10 percent, are being slashed a further eight percent. In a social security bill to be announced separately, Easter, summer and Christmas pension bonuses will also become flat sums and the retirement age raised.

On the positive side, the transport and energy markets are to be liberalised in order to create new growth. Both liberalisations have been mandated by the European Union and are years overdue. The finance ministry is also promising to simplify procedures for setting up a business.

The government says it will not back down in the face of protests against these measures, but will ignore their political cost, because the choice Greece faces is between salvation and annihilation.

See the Financial Times article.
See the Bloomberg article. 

The FT's Walter Munchau:
Angela Merkel and her inexperienced economic advisers have no idea about the dynamics of sovereign crises. They never bothered to look at the experience of other countries, notably Argentina. Waiting until the moment a country is about to fail – which is how the German chancellor interpreted the political agreement she accepted in February – constitutes an abrogation of leadership that is bound to end in financial ruin. It means that everybody, Germany especially, has to pay billions of euros more than would have been the case if the EU had sealed this in February...

...Three things are required if the eurozone is to survive in the medium term: a crisis resolution system, better fiscal policy co-ordination, and policies to reduce intra-eurozone imbalances. But this is only the minimum necessary to get through the next few years. Beyond that, the eurozone will almost certainly need both an embryonic fiscal union and a single European bond.

I used to think that such constructions would be desirable, albeit politically unrealistic. Now I believe they are without alternative, as the experiment of a monetary union without political union has failed. The EU is thus about to confront a historic choice between integration and disintegration.

The NYT's Paul Krugman
The Greek fiscal problem has been turning into a death spiral, in which fear of default is driving up borrowing costs, making default even more likely. The EU has now, in effect, given up on trying to restore market confidence; instead, it’s going to break the death spiral by main force, providing Greece with all or almost all the financing it needs directly, at an interest rate much lower than the market was demanding.

The BBC's Gavin Hewitt:
This is a day of humiliation. It was never envisaged that a eurozone country would need bailing out. Today the EU had to launch one of the biggest financial rescues ever attempted. What the plan does do is to buy time and to shelter Greece from the fierce winds of the markets. What it doesn't do is to answer the questions of whether economies so fundamentally different as Greece and say Germany can be part of the same monetary union.

The Economist (before Sunday's bailout announcement):
If Portugal comes under intense pressure, contagion might then spread to Ireland, Italy or Spain, the other euro-area countries with some mixture of big budget deficits, poor growth prospects and high debts. Only swift and decisive action by the leaders of Europe's big economies is likely to head off the current crisis. Default by a smaller member such as Greece would be a body blow to the euro's standing but it need not spell the end of the currency. However, that might not be the case if the problems spread further afield.

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