There were violent protests in Athens as the Greek government voted through yet another round of tax rises and spending cuts. These highly unpopular austerity measures were demanded by the European Union and the International Monetary Fund as preconditions for releasing the next €12bn of their bail-out package. Separately, a group of French banks floated a convoluted plan for rolling over Greek bonds that are due to be repaid in the next three years.
What the commentators said
“George Papandreou is proving to be a fighter,” said the FT’s Lex column. Despite opposition in parliament and on the streets, Greece’s prime minister is succeeding in pushing through tough proposals – and his victory is worth winning as “it has halted, if only for a moment, the country’s descent into meltdown”. However, it does not solve Greece’s fundamental problem of an enormous debt burden that it will be unable to refinance in the markets over the coming years.
Solving this issue is supposedly behind the French proposals. These defy simple description, but essentially for every €100 of Greek bonds needing to be repaid in the next three years, €70 would be lent back to Greece for 30 years at an interest rate linked to its GDP growth rate. However, €20 of that €70 would be used to purchase 30-year AAA-rated bonds that will provide collateral for a guarantee against Greece defaulting on the new bonds, so Greece will effectively receive a rollover of 50% of its matured debt.
Does this financial engineering actually address Greece’s solvency problems? “Not at all,” said analysts at Société Générale. “It only buys time and may restore stability.” The FT was harsher, judging that “it seems designed less to make Greece’s situation more sustainable than to help banks offload risk from their balance sheets”.
Ultimately, the problem is that the EU’s leaders are still in denial, refusing to accept that Greece cannot pay its debts, said The Economist. What’s really required is an “orderly restructuring”, halving the country’s liabilities to around 80% of GDP. This would be accompanied by extensive reforms and many years of support while Greece works through its problems, which would inevitably require more political integration between eurozone countries.
That would not be popular with voters, but politicians face an “unsavoury choice” since the alternative threatens to open even bigger faultlines within the EU, said Bloomberg.com’s View column. The disorderly failure of rescue efforts would “put pressure on Portugal and Ireland – and possibly also Belgium, Italy and Spain – to follow Greece into default and out of the euro”.