Of all the European leaders, Economic Affairs Commissioner Olli Rehn is perhaps the last you would expect to have a finger on society’s pulse. Yet it was the Finnish technocrat who produced the most apt analogy at the end of an epic Eurogroup session that ended on Tuesday morning with eurozone finance ministers agreeing a new bailout for Greece.
“In the past two years and again this night, I’ve learned that ‘marathon’ is indeed a Greek word,” Rehn told reporters. There seemed to be an exquisite timing to the marathon reference, even though most journalists were too bleary-eyed at that point to appreciate it. Marathon can refer to one of two things: one of the most decisive battles in history, in which the ancient Greeks repelled the threat of the Persians and a disastrous future, or the long-distance race which marks the lung-busting effort of messenger Pheidippides to inform the Athenians of victory over the invading army.
Both cases are fitting analogies for the impossible situation Greece finds itself in. On the macro level, the country is attempting to avoid a potentially destructive disorderly default while external — as well as some domestic — forces do their worst. On the micro level, most Greeks will now feel weary from navigating demanding terrain over the last couple of years, while the finishing line keeps drifting off into the distance rather than getting closer.
Where these two allegories might cross paths in the case of modern Greece after the Eurogroup’s bailout decision is that the country might escape the clutches of disaster but its people, like the ancient messenger, could collapse from exhaustion.
Finance Minister Evangelos Venizelos labeled yesterday’s agreement for 130 billion euros in loans and a debt reduction of more than 100 billion euros via haircuts for private bondholders as the most significant in Greece’s postwar history. It may well be, but it does not guarantee economic peace and prosperity in our time.
In fact, the supposed default-busting package raises as many questions as it answers. First of all, there is the issue of the illusion that Greece’s debt has actually been reduced. While private investors have been invited to accept a 53.5 percent haircut on the Greek bonds they hold, this will have little impact on Greece’s overall debt load because it will be borrowing another 130 billion euros from the eurozone and the IMF. Recent research (conducted based on a 50% haircut) by Nicola Mai at JP Morgan, which was cited by the Financial Times’ Gavyn Davies, indicated that Greece’s debt would be 163 percent of GDP before the restructuring and 154 percent afterward. The only difference is that Greece will owe more to the public sector than the private sector. The private sector accounts for 79 percent of GDP at the moment. This will fall to 43 percent after restructuring, according to Mai. Public sector debt, however, will rise from 84 percent of GDP to 111 percent.
Also, a recent JP Morgan paper suggested that the haircut would make only a small difference to Greece in terms of debt repayments. Last year, Greece paid 15.5 billion euros, or 17 percent of total general revenues, in net interest payments — more than three times higher than the OECD average. JP Morgan estimated that a 50 percent haircut with a 2.75 percent coupon would reduce the annual interest paid by Greece by less than 4 billion euros to 13 percent of revenues.
With the haircuts out of the way and investors being given new bonds written under English law, Greece has no wiggle room left as far as private debt is concerned. On public debt, it is left with two basic options: Its taxpayers have to service the debt or the country has to default and leave other eurozone taxpayers, rather than banks or investors, to foot the bill.
This is where the agreement for the creation of an escrow account and for Greece to adopt a law obliging it to use public revenues for debt repayment before any domestic spending is relevant. Apart from being a feature that some eurozone governments can sell to domestic audiences, this policy of debt servicing first has a potentially significant practical consequence. Greece is projected to run a primary budget deficit of 1.5 percent of GDP this year, which means that even without paying the interest on its loans, the government would be about 3 billion euros short by the end of the year. Add to this the fact that in January alone tax revenues were 1 billion euros beneath the target and it’s easy to see how a substantial shortfall could build up by the end of the year. If the eurozone is not willing to bridge this spending gap, which is set to continue next year as Greece is not expected to be in surplus until late 2013, and instead insists that money be put into the account to cover debt servicing for the months ahead, Greece will head for an internal default. The state will not be in a position to pay at least some pensions and salaries or to return taxes to businesses.
The social impact of such a move would be tremendous and is likely to put the whole program in jeopardy. But this may happen anyway given that the issue of debt has been addressed, however questionably, but the underlying problem of Greece’s economy has not.
Just like the first EU-IMF memorandum, this program comes in two parts. One is the austerity measures needed to rein in Greece’s deficit and the other is the structural reforms that are designed to unleash forces of growth in the free-falling Greek economy. A supreme irony has underpinned this process from the start in 2010: There has been substantial public support for the reforms but few have been carried out, while the austerity has been widely unpopular but the government and its lenders have never shied away from applying it.
More of the same will lead Greece into a dead end economically, politically and socially. Critics can justifiably argue that the Greek government, sometimes bowing to small special interest groups, has been less than enthusiastic in conducting the reforms it has promised but nobody can doubt the sacrifices that have been made by the Greek people. The most drastic reduction in a primary budget deficit that Europe has seen for over 30 years was achieved thanks to Greeks accepting poorer public services and giving up more of their salaries. Real disposable income in Greece has fallen by 23 percent since the crisis began. Many have paid the cost of this rapid fiscal adjustment by losing their jobs. Unemployment has doubled in a year to pass 20 percent and tens of thousands of businesses have closed.
With GDP shrinking by 7 percent last year, it means that the Greek economy has contracted by 16 percent since the crisis began and is on target to surpass the biggest recessions the world has seen in developed countries. In this environment, further austerity without reform and the hope of growth cannot carry the public’s consent for long.
The Greek government, meanwhile, has burned its bridges with the troika by failing to adhere to reform pledges. Greece’s lenders are now focused simply on the numbers because they are the only thing the troika feels it can trust. This points to Greece being set up for a huge fall in the near future. In the coming months, troika inspectors will examine Greece’s fiscal data and reform progress. They are likely to find that Athens will be off target on both. The recession, which will only be compounded by the wage and pension cuts agreed to this month, will foul up the fiscal statistics, while the deep-rooted malaise in the public administration will have prevented any head of steam being built up as far as reforms go.
Then, the choice will be more “corrective” measures, or even an internal default – which carries numerous damaging complications – or an outright default. At which point we will recall the last line of Robert Browning’s poem about Pheidippides: “So to end gloriously — once to shout, thereafter be mute: ‘Athens is saved!’ — Pheidippides dies in the shout for his meed.”