|Page (1) of 1 - 02/21/12||email article||print page|
New bailout saves Greece from default now, but long term prospects for recovery are shaky
BRUSSELS (AP) ' A second, euro130 billion ($172 billion) bailout and a deep debt write-off for financially stricken Greece will ward off a financial disaster in Europe.
Economists, however, only give the deal a slim chance of putting the country on the path to economic recovery ' and steadying its place in Europe's currency union.
Agreement on the bailout, reached early Tuesday after an all-night summit of finance ministers seven months after it was first proposed, will give Greece euro130 billion in loans through 2014 from other eurozone governments and the International Monetary Fund. It's the country's second bailout, following a euro110 billion rescue secured in 2010 that didn't return the country to solvency.
The agreement also assumes that banks and investors owed money by Greece will take new bonds that reduce their holdings by more than half.
In return for the second bailout, Greece has agreed to painful and humiliating measures imposed by its mistrustful partners which also use the euro, annoyed after two years of what they say are broken promises to reform. Athens agreed to cut spending and wages, and to permit outsiders to supervise its finances through the presence of European Union and International Monetary Fund officials permanently stationed in Greece. The rescuers also demanded a separate account for the aid money and legal guarantees that creditors get paid before teachers, doctors and police do.
The finance ministers from Greece and the other 16 countries that use the euro wrangled until the early morning over the details of the rescue, squeezing last-minute concessions out of private holders of Greek debt who agreed to lose 53.5 percent of the face value of their investment to avoid even more severe losses expected if Greece fails to pay euro14.5 billion in debt coming due March 20.
The fear is that an uncontrolled bankruptcy could unleash market panic across the rest of the continent, further unsettling other struggling other debt-stricken countries such as Ireland, Portugal or the much bigger Italy or Spain.
Serious risks of failure include the chance that Greece's economy remains in a deep recession ' where it's been for four straight years ' instead of returning to growth in 2013 as the deal assumes. That would undermine chances of paying even the reduced debt load, estimated at a still-high 120 percent of annual economic output in 2020, down from 160 percent now.
Additionally, political outrage over the cutbacks could lead Greece politicians to balk at the tough conditions. That could push rescuer countries ' led by Germany ' to cut off further funding.
Elections in Greece are expected in April. The leaders of the two main parties have committed to the cuts and reform program, but anti-bailout parties have been gaining in the polls.
Growth is the key. But Greece's economy shrank 7 percent in the fourth quarter of last year and unemployment is 19 percent, a consequence of cuts in public wages and increased taxes inflicted during a downturn.
If that keeps up, even the rescuers acknowledge the reduction goal of 120 percent of GDP is long gone.
Success "really depends on the assumptions you make in terms of growth and interest rates," said Diego Iscaro, an economist at IHS Global Insight. "The risks are clearly on the downside. The main risk comes from the economic situation, the economic dire straits."
"By austerity alone, Greece will not solve the problems it has at the moment. We don't know when the economy will return to growth and how it will grow."
Unless something breaks the cycle of austerity and contraction "something will have to give."
Even if it later balks at the conditions for the bailout, Greece would have difficulty writing down the new debt it issued to private bondholders, who demanded stronger legal protections. Official creditors ' the IMF, the eurozone countries and the European Central Bank ' would also have difficulty accepting more writedowns. Inability to pay ' or unwillingness to accept the harsh conditions ' could lead to a non-negotiated "hard" default that could end in Greece leaving the euro.
The eurozone and the International Monetary Fund hope the new program will eventually put Greece back into a position where it can survive without external support. Both private and official creditors went beyond what they had said was possible in the past. On top of the new rescue loans, Athens will also ask banks and other investment funds to forgive it some euro107 billion ($142 billion) in debt, while the European Central Bank and national central banks in the eurozone will forgo profits on their holdings.
The deal "closes the door to an uncontrolled default that would be chaos for Greece and Greek people," said European Commission President Jose Manuel Barroso.
But despite those unprecedented efforts, it was clear that Greece was at the very best starting on a long and painful road to recovery. It is being pushed to make its economy more business-friendly and productive by opening access to closed trades and professions; halting rampant tax evasion; allowing more flexibility in wage bargaining between companies and unions; simplifying starting a business; and cutting its bureaucracy.
But those measures will take years to work ' if Greece's politicians are willing or able to push them through.
"It's not an easy (program), it's an ambitious one," said Christine Lagarde, the head of the IMF, adding that there were significant risks that Greece's economy could not grow as much as hoped.
Including Greece's first bailout worth euro110 billion ($146 billion), the new deal means every Greek man, woman and child will owe the eurozone and the IMF about euro22,000 ($29,000).
In Athens, the reaction to the news was a mixture of relief the country has avoided financial catastrophe and fear of a dark future.
"I don't see it with any joy because again we're being burdened with loans, loans, loans, with no end in sight," architect Valia Rokou said in the Greek capital.
Greek politicians nevertheless greeted the package as a turning point for their battered country.
"It's no exaggeration to say that today is a historic day for the Greek economy," said Greek Premier Lucas Papademos, who had rushed to the finance ministers' meeting to lend weight to his country's pleas for help.
For those who Greece owes money, the bond swap will lop euro107 billion off Greece's euro352 billion load. On top of that, investors will be asked to give Athens 30 years to repay them, compared with just under 7 years.
Average interest rates would fall to 3.65 percent from around 4.8 percent.
Overall losses for private bondholders would be above 70 percent when accounting for the new bonds' longer repayment period and lower interest rate.
Private investors weren't the only ones having to give ground. The eurozone countries will reduce the interest that Greece has to pay for its first package of bailout loans to 1.5 percentage points over market rates from between 2 percentage points to 3 percentage points currently.
At the same time, the European Central Bank and the national central banks in the countries that use the euro will forgo profits on their Greek debt holdings, again reducing the costs for Greece.
But several hurdles remain before Greece will see any of the money or other benefits of the new program.
Apart from the implementation of more than 30 different savings and reform measures by Greece, the new bailout has to be debated by parliaments in several member states, including Germany, the Netherlands and Finland.
The IMF also still has to decide how much of the euro130 billion bill it is willing to stump up. Going into the meeting, the Washington-based fund had indicated its contribution will be lower than the one-third of the total it has provided in previous bailouts.
IMF chief Lagarde said the fund's board would decide on its contribution in the second week of March.
"In doing so it will have in mind the overall program, but also additional matters such as the proper setting up of a decent firewall," Lagarde said with reference to Europe's current and future bailout funds.
At the moment, the overall ceiling for eurozone rescue loans has been set at euro500 billion ($663 billion), much of which has already been committed to Ireland, Portugal and now Greece. Euro leaders will decide at their summit in early March whether that ceiling should be increased.
On top of that, it will also take some time to see how many private creditors will participate in the debt relief and how many will have to be forced to sign up through new legal clauses. The representatives of the private bondholders said they were confident that investors would find the deal attractive, but some analysts fear that imposing losses on even some bondholders may destabilize markets.
Derek Gatopoulos and Elena Becatoros in Athens, Greece, and Sarah di Lorenzo and Don Melvin in Brussels contributed to this report.