No heroes in a Greek war

Greece’s caretaker prime minister, Lucas Papademos, is facing a brutal battle on two fronts in the next few days as he tries to keep the debt-strapped country from lurching into bankruptcy.

His first battle is with the troika – representatives from the International Monetary Fund, the European Union and the European Central Bank – over the country’s second €130 billion bailout ($US168 billion) which was agreed late last October.

It’s now become clear that bailout isn’t big enough to solve Greece’s crippling financial woes. The Greek economy looks set for another dismal year, after contracting by more than 6 per cent last year. Athens has failed to deliver on its earlier promises to boost its tax revenues by clamping down on tax evasion. And the country’s program for selling off state-owned assets has fallen badly behind schedule.

One possibility would be to boost the size of the bailout, but there’s little sympathy for this position. France has already warned that the eurozone will not be contributing any more funds to the Greek bailout. The IMF is looking to raise an extra $US500 billion to help it fight the eurozone’s debt crisis, but Washington and London have shown a clear reluctance to dig into their pockets.

As a result, the troika is tightening the screws on Papademos, pushing him to agree to even tougher austerity and reform measures, despite the battered state of the Greek economy.

But there’s a growing Greek resistance to further belt-tightening, and politicians are responding. Recently, senior members of Greece’s main centre-right party, New Democracy, have criticised the troika’s demands for further austerity.

The second battle that Papademos faces is with private bondholders – such as banks, insurance companies and pension funds. Three months ago, bondholders agreed to take a 50 per cent haircut on their loans to Greece, which would cut €100 billion off the country’s €360 billion mountain of debt.

After tortuous negotiations conducted at his home, Papademos was close to getting bondholders to agree to a debt restructuring which would see them take a loss of 60 per cent on their loans. Bondholders would swap their old bonds for new bonds, on which they would be paid an average interest rate of 4 per cent.

But then the talks hit a snag. The troika expressed concerns that this interest rate was too high, and would leave Greece with too heavy a debt burden. Instead, they insisted that bondholders should agree to cut the average interest rate to 3.5 per cent, which would leave bondholders nursing even heavier losses.

The troika’s last-minute demand caused negotiations between Athens and the private bondholders to stall over the weekend. Papademos is now hoping to reach a deal with private bondholders by late January, in time for the next European summit.

But time is running out for Papademos. Athens must have its new bailout package in place by March 20, when it faces a €14.4 billion debt repayment. But the bailout money can only start flowing when Athens reaches agreement with its private creditors.

Even if Papademos wins both battles – persuading his fellow Greeks to swallow further tough austerity measures, and persuading bondholders to take heftier losses on their loans – it’s unlikely to be a permanent victory. After the debt restructuring, Greece will be left with a crushing debt burden.

At some point, the country will likely be tempted to quit the eurozone and devalue its currency, rather than continuing in an endless austerity-induced depression.

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An excellent article Karen, my bet is that Greece won't get things done in time to get the bailout. I do think now they will default and leave the euro (No heroes in a Greek war, January 20). When they default, that's when the EU will help then to prevent a disorderly default.
Having defaulted on their debt seven times in the last century I think there is no way that Greece will not take the same path to resolve their current crisis (No heroes in a Greek war, January 23). For the troika and others to continue demanding more austerity from Greece not only displays their inability to understand what needs to be done economically to solve the problem but also their failure to learn the lessons of history.
Greece will default. Until they do they will continue gaming the European Community to get as much out of them as they can before the inevitable occurs.
Karen, I think the best strategy for Greece is to default, leave the euro and start again; and fund their future from their own internal and external revenue streams; and live within their means - it is only then that the levels of tax evasion and financial corruption in the country will be addressed (No heroes in a Greek war, January 23).
Euro contagion isn't an issue for the Greek populous – its the issue for the rest of Europe/Globe – that why they keep trying to bail them, just making an insolvent situation worse – the longer it takes the worse its going to become. This strategy will have the side benefit off teaching bond holder a lesson they need to learn, i.e. never lend money to anyone who can't pay it back.
Thanks Karen (No heroes in a Greek war, January 23), naturally we all have our seat-belts on and fastened – let's hope it's a slow wreck.
I wonder how much of the alledged Greek economic contraction is real and how much is related to the measured Greek economy being transferred to their black economy (No heroes in a Greek war, January 23)? If you were a Greek public servant who had a small cash business on the side and you have just had a cut in your takehome pay, would you work harder in your public service job or harder in your cash paying business?
No wonder the Greeks haven't sold any assets. I think they always knew they were going to be hung out to dry so they have made sure there will be something left in the pantry (No heroes in a Greek war, January 23).
If Greece defaults it won't be able to pay it's internal bills such as public servant salaries or social welfare because it will still be in deficit. The state would effectively collapse (No heroes in a Greek war, January 23).
Welcome back Karen, you have been missed.
I think it's been obvious for months and months that to get kicked out of the Eurozone is exactly what Greece needs to happen. (kicking themselves out would be a bad mistake of course). So after going back to a very heavily devalued Drachma good old inflation can set in and be put to work and thus start up the Greek economy again (No heroes in a Greek war, January 23).
I wonder if countries like France and Austria and other former Eurozone friends of Germany, might consider this to kick their economies along because it's a dead cert that the other PIIGS will be looking towards that time before too long. Sorry Germany, the joke is going to be on you!