SALON

Thursday, Feb 23, 2012 2:00 PM UTC

Is a Greek debt default still inevitable?

The bailout will avert a euro zone breakup for now, but many worry it won't be enough to fix the nation's economy

By

Topics: GlobalPost, Greece, European Financial Crisis, European Union,

Is a Greek debt default still inevitable? A pedestrian passes outside a pawnshop in Athens, Tuesday, Feb. 21, 2012(Credit: AP Photo/Thanassis Stavrakis)

ATHENS, Greece — They contemplated a divorce but ended up having another baby.

Global Post

Greece and its euro zone partners saved their marriage by agreeing on a $170 billion bailout, but it hasn’t squashed talk of a messy breakup.

Some analysts see a Greek debt default as inevitable. Even Greece’s lenders fear the program is “accident prone,” as they said in a report for euro zone finance ministers before they approved Tuesday’s bailout.

It’s far from a universal opinion. Greek leaders lauded the agreement, naturally, saying it saved the country from a chaotic default. Others add that Greeks — despite the occasional violent protest against austerity measures — grudgingly accept that reforms are necessary.

Still, more of the same won’t cut it, said Costas Michalos, president of the Athens Chamber of Commerce and Industry.

“It’s a bad rescue package,” he said. “It’s not the right mixture of economic policies. If we follow the same economic policies of the past two years, there will be no other option than default, which I’m sure no one wants.”

The new loan package — Greece’s second massive bailout in as many years — aims to finally fix the country’s debt problems and restore its battered economy. It requires wage cuts and public sector layoffs, and strives to make the economy more competitive, which would attract investment.

A Eurogroup statement issued after the vote Tuesday in Brussels said the program is a “comprehensive blueprint” for debt sustainability by 2020 and economic growth. The success, it noted, “hinges critically on its thorough implementation by Greece,” no doubt a reminder of the country’s track record of missing reform targets.

“One can’t help but get the feeling that everyone involved is going through the motions, doing what they feel they have to do, rather than what they want to or what they believe in,” Sony Kapoor, managing director of Re-Define, a London-based think tank, said in a statement. “Confidence in the success of what has been agreed is rather low.”

Greece “will almost certainly” need yet another bailout, Kapoor added. “The troika have had to do some arithmetic gymnastics in order to make the numbers add up but their optimistic assumptions are unlikely to hold.”

Yet, for all their tough talk about cutting off the free-spending Greeks, the euro zone countries ultimately chose the safe route. The “comprehensive blueprint” helps Greece but also safeguards financial stability “in the euro area as a whole,” the Eurogroup statement said.

The new package hinges in part on private bondholders taking a nominal 53.5 percent loss, which will wipe out more than $140 billion from Greece’s overall debt. The IMF warned back in December that unless there’s near-universal voluntary participation by the bondholders, it would be hard to achieve debt sustainability by 2020.

Greece is expected to take extraordinary efforts to repay its creditors. It plans to amend its constitution to prioritize repayments. Also, the lower-valued bonds to be issued to private investors will be governed under English law. That provides stronger protections for investors.

Prime Minister Lucas Papademos has been criticized in some circles for conceding those guarantees, but University of Piraeus finance professor Dimitris Malliaropulos sees the other side.

“That, for me, is a guarantee that Greece will stay in the euro,” he said, adding that the commitment to the euro should improve investor sentiment.

Countries that default usually can devalue their currency, which makes exports cheaper, boosting growth. But with Greece ensuring euro repayments to lenders, there’s no incentive to default, Malliaropulos said.

“If you leave the euro, you should do it now — before the debt exchange,” he said.

The swap is scheduled to be complete in early March. If that and other conditions are met, Greece expects to receive bailout cash — avoiding default — before nearly $19 billion in bond repayments are due later in the month.

Petros Doukas, a former deputy finance minister, said he’s confident Greece will stay on course. He advocates for a larger debt write-off and a Marshall Plan-style spending package by the European Union and the United States — an idea he acknowledges is unlikely to occur.

The optimism, he said, stems from acceptance by politicians and average Greeks that there’s no turning back.

“Whoever thought that pensions and salaries could be reduced? It was unprecedented thinking,” Doukas said. “People complain about it, but they accept it.”

A potential curveball is an election planned in late April. Papademos is an unelected technocrat whose job is to shepherd Greece through the bond swap and bailout negotiations. He’s currently leading a coalition government that includes Greece’s two large parties, the conservative New Democracy and the Socialist PASOK.

Leaders of both parties have signaled their post-election commitment to carry out the reforms demanded by international lenders. Polls show New Democracy leading, but likely in another coalition government.

“The politics are a major risk for the Greek economy,” Malliaropulos said. He noted that Greece has had only a few coalition governments and “they didn’t go very well.”

More GlobalPost

More Ken Maguire.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
    Credit: AP/LM Otero

  • Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
    Credit: AP/Matt Rourke

  • A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
    Credit: AP/Jenny Aicher

  • Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
    Credit: AP/Molly Riley

  • Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
    Credit: AP/J. Scott Applewhite

  • Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
    Credit: AP/Carolyn Kaster

  • O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
    Credit: AP/Las Vegas Review-Journal/Jeff Scheid

  • Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
    Credit: AP/NASA/Chris Hadfield

  • When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
    Credit: AP/Jacquelyn Martin

  • A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
    Credit: AP/The Duluth News-Tribune/Clint Austin

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 13 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

Salon is proud to feature content from GlobalPost, an awarding-winning international news site that focuses on original reporting from journalists stationed around the world. GlobalPost combines traditional journalistic values with the power of new media to offer a fresh perspective on global developments.

follow salon

Most Read

Popular on Reddit

links from salon.com

vote
FBI reportedly joins Bachmann campaign finance probe
209 points210 points | 9 comments
vote
Jon Karl makes things worse: He regrets “inaccurate” Benghazi email but says his story based on it “still entirely stands.” Really. ABC News?
181 points182 points | 29 comments
vote
Paul Krugman’s right: Austerity kills. "In an economy where we’re all in the same boat, one person’s spending is another person’s income. So when the government cuts spending, it reduces people’s income, leading to less business, more unemployment, and a vicious spiral of slowing down the economy."
160 points161 points | 93 comments
vote
“Jodorowsky’s Dune”: The sci-fi classic that never was.
76 points77 points | 15 comments
vote
Doug Henwood: Capitalism Thrives on Class Exploitation
41 points42 points | 5 comments

From Around the Web

Presented by Scribol
listener_new_rect The Listener: So long, Sookie Stackhouse

Recommendations