The EU edged closer to a second bail-out of Greece this week. Greece received €110bn of loans last May, but has fallen behind on its austerity programme. With interest rates on its debt sky-high, it will be unable to return to the markets for funding next year as envisaged in the 2010 rescue package. It needs around €60bn to tide it over until the end of 2013. Much of that will be funded by new loans, but Greece is expected to raise part of it by privatising state assets. Further spending cuts will be part of the package.
A haircut on Greek debt, which the European Central Bank had warned could cause a Lehman-like meltdown in the closely interconnected European banking system, is apparently not an option. Policymakers aim to finalise a new aid package at the end of the month.
What the commentators said
Given “the extreme vulnerability of the European banking system”, it’s no wonder European leaders have decided to “play for time by continuing to muddle through”, said John Plender in the FT. The longer restructuring is put off, the longer banks have to beef up their capital and reduce their exposure to the periphery.
The basic problem hasn’t gone away, however, as Landon Thomas Jr pointed out in The New York Times. How is “an economy in freefall” supposed to generate the growth to start making a dent in its public debt-to-GDP ratio? Greece is in a debt trap whereby austerity measures undermine the economy and make it even harder to lower borrowing. “There is no getting around it”, said hedge fund manager Jason Manolopoulos. “Greece is insolvent.”
There is also a risk that the Greek parliament will fail to endorse the new bail-out package, which could endanger the deal. Without more help, Greece will run out of money next month. That raises the spectre of a default before the banking system has had time to prepare.
Moreover, carrying on with the adjustment programme may become politically impossible. Protestors “are out in force… all across the country at a relatively early stage in this austerity process”, noted Plender. Meanwhile, Ireland’s shaky economy means it may well also have to restructure, the Ernst & Young Economic Eye said this week. The saga grinds on and on.