A second rescue package for Greece was finally agreed this week. Greece is to receive another €130bn, and private bondholders will take a haircut of 53.5% of the value of their bonds. This should help Greece’s debt pile to fall to 120% of GDP by 2020.
To unlock the cash, Greece must take further action by the end of the month, including further spending cuts worth 1.5% of GDP – with more to come in the next few months – and a reduction in the minimum wage. Greece will also have to deposit a quarter’s worth of debt service payments into a segregated account to be monitored by European policymakers, and submit to “enhanced and permanent” monitoring by the European Commission.
What the commentators said
The proposed haircut for bondholders, a reduction in the face value of the debt worth €107bn, is “momentous”, said Robert Peston on BBC.co.uk. “In the long and tawdry history of governments borrowing more than they can afford”, this is an “unprecedented write-off – all the more astonishing because Greece is a pretty small economy”.
It’s getting rapidly smaller all the time, which is the main problem with this bail-out deal. The eurozone assumes that yet more austerity will improve the public finances, “but have only a modest impact on economic growth”, notes Lombard Street Research. GDP is expected to shrink by just 4% this year, flatline in 2013, and return to robust growth thereafter. This “is ludicrous and runs counter to all” recent evidence.
Harsh austerity has simply raised the debt-to-GDP ratio by undermining growth – the economy is set to shrink by 7% this year. The latest measures, then, “will prove self-defeating”, said Jeremy Warner on Telegraph.co.uk – as a leaked report commissioned for eurozone ministers actually concludes.
Under the absurdly optimistic baseline scenario, another €50bn bail-out would be needed by the end of the decade. Meanwhile, the Greek election in April could well derail the deal, as extremist parties who haven’t pledged to push through the austerity programme are gaining support. Talk about “throwing good money after bad”.
Policymakers know this, said Felix Salmon on Reuters.com; they’re simply buying time. This deal should give them a chance “to work out how to shore up Portugal”, which could well be the next domino threatening to topple over.