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How much recession can Greece take?
Karen Maley
Published 8:31 AM, 6 Feb 2012 Last update 8:31 AM, 6 Feb 2012
Investors are again being haunted with the prospect of a disorderly Greek debt default, as Greek political leaders dig their heels in and resist tough new austerity measures that are being demanded as the price of the country’s latest €130 billion ($US170.6 billion) bailout.
In discussions that dragged on for five hours overnight, Greece’s technocratic prime minister, Lucas Papademos, gave the leaders of the country’s major political parties a brutal choice: either they sign up to tough new spending cuts and labour market reforms, or the country would be plunged into a chaotic default.
But although the leaders – former prime minister George Papandreou, from the Socialist party, Antonis Samaras from the conservative New Democracy Party and George Karatzaferis from the extreme right LAOS – agreed to around €3 billion in spending cuts, they resisted demands for Greece to cut private sector wages.
The 'troika' – representatives of the European Union, the European Central Bank and the International Monetary Fund – want Greece to cut private sector wages in order to boost the country’s competitiveness. But most Greek political leaders, and Greek union bosses, are fiercely critical of the idea of wage cuts because they believe they will only worsen the country’s depression. “They’re asking for more recession than the country can take,” complained Antonis Samaras, who heads up the centre-right New Democracy party, as he left the meeting.
According to reports on Greek television, Papademos has now set a deadline of midday today for the three leaders to let him know whether they agree in principle with the austerity measures, before talks resume later today.
While there is a recognition that it is important for Greek politicians to be seen by voters to be putting up a fight, there is a growing fear that all the political grandstanding could backfire, and plunge the country into bankruptcy. Athens faces an important €14.5 billion bond repayment on March 20, and could be forced to default unless its second €130 bailout package is in place.
Meanwhile, the eurozone is not disguising the fact that its patience with the antics of Greek politicians is wearing thin.
During a conference call on Saturday, eurozone finance ministers threatened Athens that it faced default next month unless it agreed to the new loan conditions. And Jean-Claude Juncker, who heads up the group of eurozone finance ministers, has bluntly warned Athens of looming bankruptcy unless it accepts the conditions of its latest €130 billion bailout. “If we were to establish that everything has gone wrong in Greece, there would be no new program and that would mean that in March they have to declare bankruptcy,” he said in an interview with the German publication Der Spiegel.
The European Commissioner for Fisheries, Maria Damanaki, who is of Greek nationality, explained the growing European frustration with Greece. In an interview with the Greek weekly To Vima, she argued that the politics of the past two years had put the country on a “disastrous path”.
“We promised changes that we failed to implement. We’ve talked a lot and done little. We agreed to schedules that we didn’t meet. We thus created the impression of a deeply unreliable country”, she said.
Meanwhile, most Germans think that the eurozone would be better off without Greece, according to a survey published on Sunday by the German daily Bild. In the survey, 53 per cent of Germans who were surveyed thought that Greece should return to the drachma, compared with 34 per cent who believed that Athens should keep the euro.
And an overwhelming 80 per cent of Germans were opposed to the idea of giving the country any more money until it implemented the troika’s reforms.
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19 Comments
Contribute to the Conversation
Michael Kennedy wrote:
So it has come to this. For the past two years Greece has talked a lot, promised much, and delivered little. now the chips are down, accept these new conditions or default. Today by noon European time we will know (How much recession can Greece take?, February 6).
The conservative party that led Greece into the EU with connivance from Goldman Sachs (cooking the books) is saying it does Not accept the conditions. It does not have a majority. Meanwhile more and more anecdotes from Greece refers to its non receipt cash economy.
6 Feb 2012 9:00 AM
Geoff Croker wrote:
A sudden Greek default means all those credit default swaps start to roll. That's $US280 trillion of them (How much recession can Greece take? February 6).
Greece cannot be allowed to default. The EU has nowhere to hide. Simply the ECB must pay off all of Greece's foreign debt and the EU must remove Greece from the euro.
The $280 trillion is supposed to balance out. It won't. There will be many institutions that could be "discovered" to be dishonest. The BoE will print now to cover off the Greek debt. So will other sovereigns. In the end the non-Greek bond holders will receive 100 per cent.
6 Feb 2012 9:18 AM
Tony Holland wrote:
The puzzle is:
Greek leaders know what they need do to get the money, they know the time lines to put the paperwork into play to get it.
They know when their next payments are due, they know they haven't got the cash to meet such payments.
They know these last min. attempts to change the terms aren't working, so why on earth are they still arguing.
Even if they now agree they are going to default. Talk about shouting at the moon, these guys are barking.
(How much recession can Greece take? February 6)
6 Feb 2012 9:34 AM
John Barbagiannis wrote:
Michael (February 6, 9.00am), the Conservative New Democracy party was not the governing party when Greece joined the European Union (in 1981) nor the eurozone in 2000, that was the socialist PASOK party. As for what have the Greeks done, well I would recommend you go to Greece and see how things are there for the everyday people. We've seen 4+ years of recession with an unemployment rate of 20 per cent and a youth unemployment rate of 50 per cent. Austerity just does not work (How much recession can Greece take?, February 6).
6 Feb 2012 9:55 AM
Nick Pontikinas wrote:
The derivatives Goldman Sachs arranged happened in 2001, which was after Greece had adopted the EMU. A bizarrely common misconception in the media. (How much recession can Greece take? February 6)
I would be interested to know how they could arrange to swap drachma revenue into yen using euro! There is confusion between this event and the other ill-conceived folly of manipulated entry into the currency bloc in 1999 (read: the EU methodology change began the following year).
6 Feb 2012 11:13 AM
Rob Coles wrote:
How much recession can Greece take? Perhaps this headline asks the wrong question. Greece does not have any real choice (How much recession can Greece take?, February 6).
Either way, it will have to bear the consequences of its previous mismanagement. When you are bankrupt, austerity does not have to "work", it is just a natural consequence.
6 Feb 2012 12:06 PM
James Masters wrote:
Word on the street is that a large American bank has now instructed its Greek division to cease trading/exchange with Greek banks. (How much recession can Greece take? February 6)
6 Feb 2012 12:21 PM
Bryan Kavanagh wrote:
You'd have to agree with those Greek parliamentarians opposing the wage cuts, Karen. (How much recession can Greece take? February 6)
How is even less effective demand going to pull Greece out of its downward spiral? They could derive better economic efficiencies than reducing wages by ratcheting up their property tax (which can't add to costs because it's in the nature of a rent) and abolishing other damaging taxes - as Ken Henry has recommended here.
6 Feb 2012 12:31 PM
Rodger Brook wrote:
Greece only has a population of 11 million people. They are a pimple on a pumpkin in their contribution to world growth. If they disappeared tomorrow virtually nothing would change. (How much recession can Greece take? February 6)
6 Feb 2012 12:39 PM
S L wrote:
Lower wages but more employment can foster greater growth than can high unemployment and keeping up wages - even those employed will not spend because of fear that pervades with high unemployment.
(How much recession can Greece take? February 6). The Greeks may have taken up the wrong stance. When times are tough it's better to spread income across rather than exacerbate the divide between the haves and have nots.
6 Feb 2012 12:39 PM
Spiros Scafidas wrote:
How does anyone realistically expect Greece to ever be in a position to repay its debt? (How much recession can Greece take? February 6)
The EU and ECB want debt to be under 6 per cent of GDP yet they are forcing Greece's GDP to crash so that the proportional debt percentage will never be achieved. They are forcing the country's economy into extinction.
Instead of trying to find ways to help Greece's economy grow, they're forcing poverty onto everyone. The indisputable tragedy is that Greece only has itself to blame for its current woes but, being what it is now, if the ECB truly wants to help the country then Greece's bondholders need to accept a much bigger haircut than 50 per cent on their loans. They need to write them all off.
6 Feb 2012 12:50 PM
Peter King wrote:
When you have a long-standing culture and national sport of "tax evasion", that everyone plays hard at, it is no wonder Greece is in this out-of-control predicament. (How much recession can Greece take? February 6). With this same tax evasion national sport also being played fiercely in Italy, it all looks like Europe is destined for a very long period of financial pain and chronic social unrest. The house of cards is about to tumble.
6 Feb 2012 1:12 PM
Frank Sheppard wrote:
As a Greek now Australian acquaintance of mine said recently, "The problem with Greece is the Greeks. For too long the Greek populace and the Greek governments have allowed everyone the privilege of not paying taxes" The life of milk and honey has now hit rock bottom and the piper now has to be paid. It is unfortunate that 'The Piper' has continued for too long to extend credit (How much recession can Greece take?, February 6).
6 Feb 2012 2:04 PM
Jim Bernard wrote:
There is a simple solution to the financial problems of Greece and other countries (How much recession can Greece take? February 6). They simply instruct their federal treasuries to create enough credit to pay out the banks. That is virtually how Abe Lincoln paid for his side of the American Civil War after the private banks wanted extortionate interest rates on any money they loaned him.
The banks place intolerable burdens on countries. We underestimate the potential of the federal treasuries which, under their respective national constitutions, are allowed to create unlimited credit or money or whatever.
Here is a question that would befuddle the experts: What if the Greek government instructed their treasury to write a cheque to the private banks for $20 billion dollars or more?
Because it is a cheque coming from the Greek government, the private banks could hardly refuse to accept it. They might not be able to cash it, but hey, that would be their problem. The Greek government could do that until they were debt free.
Everything the banks lend is credit, which they create out of thin air. Why shouldn't governments play the same tricks?
6 Feb 2012 2:04 PM
Mark Pearce wrote:
Hard luck Greece. It's been a good run. One way or another you'll have to live within your means (How much recession can Greece take? February 6).
Choose default and instant losses of government services, salaries, pensions and benefits, down to the level you can finance internally from tax. Or, choose to reduce all of those less, adjust your tax position and pay off as much of the debt as you can over a longer period.
Tough choices, but the party had to end sometime. Regardless, some of your debt will be "restructured". Just don't expect the guys losing money on their loans to be too sympathetic. We should tank Greece for the lesson for the rest of the world.
6 Feb 2012 2:22 PM
Brian Hill wrote:
Those that have peered into the abyss do not like what they see (How much recession can Greece take? February 6). Politicians, of course, should be cast into it, forthwith!
6 Feb 2012 2:37 PM
Neil Bradley wrote:
I think Spiros Scafidas (February 6, 12.50pm) is somewhat biased and too willing to let lenders take the haircut and not the borrowers (How much recession can Greece take? February 6). It is the signal that has to be sent: don't borrow too much and don't lend to high risk countries who do not control their own currency.
6 Feb 2012 2:44 PM
John Pope wrote:
Russia defaulted on its debt in August 1998 but was able to bounce back very quickly because it devalued the ruble (How much recession can Greece take? February 6).
Greece must return to the drachma if it is to trade its way out of trouble. Such a change would be chaotic and painful in the short term but best in the long run.
If the Greek public servants think they are doing it tough, spare a thought for the Russian coal miners who did not get paid for six months.
6 Feb 2012 10:09 PM
Bill Hawil wrote:
In Greece, the Greeks have to practice tax evasion ilegally, in Australia the rich retirees don't have to pay tax at all, due to tax-free super incomes for the over sixties.
Is Australia going to go the Greek way? (How much recession can Greece take?, February 7).
7 Feb 2012 11:59 AM
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