Sunday, 5 February 2012

Greece's Moment of Truth

A version of this post aired this morning on The Rundown, PBS NewsHour's blog.

The Greek government declared on Saturday that it had reached partial agreement with its euro area creditors on a 130 billion euro bailout package. But a gulf of differences remains, with only a day of talks to go.

“We’ve effectively agreed on how to refinance and restructure the Greek banking system, the course of the privatization programme, and a number of institutional and structural changes,” Finance Minister Evangelos Venizelos said. He called the talks “extremely difficult and delicate”.

Greek and European banks would be given roughly 40 billion euro of Greece's second bailout package to refinance after taking massive losses on Greek debt. The separate agreement for the writedown by banks is, according to the government, largely concluded. 

“The distance between a successful outcome and a dead end… is very, very small,” he said. 

If Greece fails to agree to a series of austerity and reform measures by Sunday night, it may not be technically possible for governments to produce the money and for banks to carry out a bond swap before March 20. That is when Greece faces 14.5 billion euros in bond maturities it cannot afford. Non-payment would then create the eurozone’s first default. 

The two biggest areas of remaining disagreement, Venizelos said, were over creditor’s demands that Greece reduce its private sector salaries and make further cuts in public spending this year.

Greece's so-called troika of creditors (European Central Bank, European Commission and International Monetary Fund) wants the minimum wage of 751 euro a month gross to fall by at least 10 percent. It wants bonuses amounting to another 15 percent of salary to go.

Talks between unions and employers on a voluntary reduction in salaries reached an impasse yesterday, meaning that the government will now have to circumvent union talks with an act of parliament. If that happens, say the unions, they will respond ferociously. “There will be a legal challenge in court, strikes, demonstrations and protests,” said an official from the General Confederation of Greek Labour involved in the talks.

That would place further pressure on the already strained governing coalition of socialists, conservatives and right wingers. Prime Minister Loukas Papademos met with the leaders of the three coalition parties on Saturday. They will have to sign written commitments to stick to a list of austerity and reform measures by Sunday. The commitment would bind them even after an election, perhaps the most contentious condition of the bailout. 

The centre-right parties are already taking an anti-austerity line as Greece enters its fourth year of recession and unemployment stands at 19.2 percent.

Greece's recession last year may have been 6.5 percent of GDP, half a point higher than thought, estimated the Centre of Planning and Economic Research (KEPE), a respected think tank, earlier this week. That would mean a 13-point total shrinkage of the economy over the past three years, with KEPE estimating an additional 3.42 percent recession this year and zero growth in 2013.

Conservative shadow finance minister Christos Staikouras yesterday said that Greece’s inability to hit deficit tax revenue targets and reduction targets “have made more urgent than ever the re-evaluation and modification of certain policies that have proven economically ineffective.”

Greece faces an almost impossibly tight timetable before a February 13 deadline. During the week the European Commission and euro area national governments must begin the process of releasing money to finance a roughly 100 billion euro writedown of privately held Greek debt. By Monday 13 February, Greece must begin to exchange privately held bonds it cannot honour with new bonds that carry longer maturity terms and lower interest.

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