The unprecedented Greek bailout
Wednesday, 12 May 2010
Syed Jamaluddin
Eurozone countries and the International Monetary Fund (IMF) agreed to an unprecedented 110billion euro (145 billion dollars) bailout for Greece to help avert default. Faced with prospect of running out of cash to honour its debt later this month, the Greek government had few choices but to turn to its eurozone partners and IMF for help. Funds were considered to be adequate to meet its debt burden. Goldman Sachs economists said that although Greece appeared to be fully financed for the next 12 months the outlook was less certain in the coming years if social unrest erupted or more cuts were needed.
In exchange for loans, the Greek government agreed to cut 30 billion euros from its budget over three years to cut its public deficit from nearly 14 per cent of output last year to less than 3 per cent by 2014. Risking a fierce public backlash, the government plans on slashing bonuses for public sector workers and retirees, hiking sales tax and requiring workers to work three years longer to get their pensions among other measures. This is shock therapy. Even its architects admit that this austerity programme is unprecedented. This philosophy has failed wherever it was attempted.
Although Greece appeared to be out of the woods at least in the short run, economists warned that contagion risks still loomed over Portugal and Spain. Unless Portugal and Spain take measures proactively to bolster their fiscal and growth outlook, markets will be tempted to test whether the EU has appetite for any further rescues.
European governments endorsed an unprecedented 110 billion euro bailout to save Greece from bankruptcy and shore up the single currency after Athens agreed to draconian spending cuts. The first installment of the eurozone-IMF rescue package will be paid within the next few weeks, with the rest spread over three years and conditional on painful decisions. Greek Prime Minister said it would have to make big sacrifices to secure the rescue package. But Greek unions vowed to battle the austerity measures.
The bailout, worth 145 billion dollars, includes 30 billion euros of loans from IMF whose executive board is set to approve it soon. Parliaments in euro area countries will begin the process of approval to enable them to transfer their contribution to Greece before its debt repayment fall due on May 19. A summit of eurozone countries will be held in Brussels to deal with the long-term consequences of the Greek debt crisis including how to spot and halt similar problems elsewhere.
Rocked by violent street protests at home, Greece has been under heavy pressure to cut a massive public deficit that has shaken the euro, rattled markets and spread fears of contagion to other debt-ridden European countries.
Germany, which is expected to provide the biggest portion of the bailout, warned Athens it must live up to its promises. The bailout was the only way to ensure the stability of the euro. It was in the clear interest of Europe to keep Greece stable. The US President telephoned the Greek Prime Minister to welcome the deal.
The reaction in Greece was severe. According to union leaders, the austerity plan would only worsen the recession and plunge the economy into a deep coma. It is time to step up the social battle. Opinion polls suggest more than 60 per cent of Greeks oppose the government's decision to call in the IMF. The IMF's reputation for imposing harsh conditions seems bound to make the Greeks cross.
European countries finally approved the package for the Greek debt crisis which could pull down other members with severely strained public finances such as Portugal or even Spain.
Greece must adhere to its austerity programme or risk having loans withdrawn. Every three months, GreeK government must give a comprehensive report to the European Commission and the IMF about how it is implementing its plan. If there are any violations, payments will be stopped .
The Greek government has vowed a series of punishing budget cuts and tax increases in exchange for IMF-EU bailout but the measures have run up against fierce opposition at home with demonstrators staging a protest on the Acropolis and civil servants kicking off walkout. Pensioners were also holding separate demonstrations.
The bailout is also hugely unpopular in Germany. Germany's portion of the package must be approved in a parliamentary vote. Berlin agreed to provide some 22.4 billion euros over the three-year period.
In the first major test of the government's resolve to push through the austerity cuts, unions have called nationwide general strike with street demonstrations. Hundreds of thousands of civil servants began a two-day strike as the government rushed through parliament a new wave of tax hikes and wage cuts to clinch the bailout from the European Union and International Monetary Fund.
The Greek debt crisis is spreading. Europe needs a bolder, broader solution -- and quickly. There comes a moment in many debt crises when events spiral out of control. It is mystifying that a small, peripheral economy should suddenly threaten the world's biggest economic union zone. Panic about the Greek government's ability to repay its creditors is infecting other euro area countries.
Other countries may now need a helping hand, too. There is growing anxiety about the poor state of public finances in Portugal, Ireland, Italy and Spain. Each has some combination of big budget deficits and high public debt though none is as financially stretched as Greece. But their deeper problem stems from a decade when wage growth ran far ahead of productivity gains. Stuck in the euro, they can no longer cure that malady by devaluation. The only remedies are wage restraint combined with structural reforms aimed at boosting productivity. These will take time as well as political will to put in place.
Prior to the announcement of a stabilisation fund by the European Central Bank, riots broke out in Athens. Three people died when youths petrol bombed an Athens Bank. The Greek crisis blew Asian stock markets into a tailspin and the Dow Jones industrial average fell sharply on last Wednesday as images of the rioting protestors were beamed onto the New York trading floor. Europe's stock markets suffered losses.
(The writer is an economist and columnist)
Eurozone countries and the International Monetary Fund (IMF) agreed to an unprecedented 110billion euro (145 billion dollars) bailout for Greece to help avert default. Faced with prospect of running out of cash to honour its debt later this month, the Greek government had few choices but to turn to its eurozone partners and IMF for help. Funds were considered to be adequate to meet its debt burden. Goldman Sachs economists said that although Greece appeared to be fully financed for the next 12 months the outlook was less certain in the coming years if social unrest erupted or more cuts were needed.
In exchange for loans, the Greek government agreed to cut 30 billion euros from its budget over three years to cut its public deficit from nearly 14 per cent of output last year to less than 3 per cent by 2014. Risking a fierce public backlash, the government plans on slashing bonuses for public sector workers and retirees, hiking sales tax and requiring workers to work three years longer to get their pensions among other measures. This is shock therapy. Even its architects admit that this austerity programme is unprecedented. This philosophy has failed wherever it was attempted.
Although Greece appeared to be out of the woods at least in the short run, economists warned that contagion risks still loomed over Portugal and Spain. Unless Portugal and Spain take measures proactively to bolster their fiscal and growth outlook, markets will be tempted to test whether the EU has appetite for any further rescues.
European governments endorsed an unprecedented 110 billion euro bailout to save Greece from bankruptcy and shore up the single currency after Athens agreed to draconian spending cuts. The first installment of the eurozone-IMF rescue package will be paid within the next few weeks, with the rest spread over three years and conditional on painful decisions. Greek Prime Minister said it would have to make big sacrifices to secure the rescue package. But Greek unions vowed to battle the austerity measures.
The bailout, worth 145 billion dollars, includes 30 billion euros of loans from IMF whose executive board is set to approve it soon. Parliaments in euro area countries will begin the process of approval to enable them to transfer their contribution to Greece before its debt repayment fall due on May 19. A summit of eurozone countries will be held in Brussels to deal with the long-term consequences of the Greek debt crisis including how to spot and halt similar problems elsewhere.
Rocked by violent street protests at home, Greece has been under heavy pressure to cut a massive public deficit that has shaken the euro, rattled markets and spread fears of contagion to other debt-ridden European countries.
Germany, which is expected to provide the biggest portion of the bailout, warned Athens it must live up to its promises. The bailout was the only way to ensure the stability of the euro. It was in the clear interest of Europe to keep Greece stable. The US President telephoned the Greek Prime Minister to welcome the deal.
The reaction in Greece was severe. According to union leaders, the austerity plan would only worsen the recession and plunge the economy into a deep coma. It is time to step up the social battle. Opinion polls suggest more than 60 per cent of Greeks oppose the government's decision to call in the IMF. The IMF's reputation for imposing harsh conditions seems bound to make the Greeks cross.
European countries finally approved the package for the Greek debt crisis which could pull down other members with severely strained public finances such as Portugal or even Spain.
Greece must adhere to its austerity programme or risk having loans withdrawn. Every three months, GreeK government must give a comprehensive report to the European Commission and the IMF about how it is implementing its plan. If there are any violations, payments will be stopped .
The Greek government has vowed a series of punishing budget cuts and tax increases in exchange for IMF-EU bailout but the measures have run up against fierce opposition at home with demonstrators staging a protest on the Acropolis and civil servants kicking off walkout. Pensioners were also holding separate demonstrations.
The bailout is also hugely unpopular in Germany. Germany's portion of the package must be approved in a parliamentary vote. Berlin agreed to provide some 22.4 billion euros over the three-year period.
In the first major test of the government's resolve to push through the austerity cuts, unions have called nationwide general strike with street demonstrations. Hundreds of thousands of civil servants began a two-day strike as the government rushed through parliament a new wave of tax hikes and wage cuts to clinch the bailout from the European Union and International Monetary Fund.
The Greek debt crisis is spreading. Europe needs a bolder, broader solution -- and quickly. There comes a moment in many debt crises when events spiral out of control. It is mystifying that a small, peripheral economy should suddenly threaten the world's biggest economic union zone. Panic about the Greek government's ability to repay its creditors is infecting other euro area countries.
Other countries may now need a helping hand, too. There is growing anxiety about the poor state of public finances in Portugal, Ireland, Italy and Spain. Each has some combination of big budget deficits and high public debt though none is as financially stretched as Greece. But their deeper problem stems from a decade when wage growth ran far ahead of productivity gains. Stuck in the euro, they can no longer cure that malady by devaluation. The only remedies are wage restraint combined with structural reforms aimed at boosting productivity. These will take time as well as political will to put in place.
Prior to the announcement of a stabilisation fund by the European Central Bank, riots broke out in Athens. Three people died when youths petrol bombed an Athens Bank. The Greek crisis blew Asian stock markets into a tailspin and the Dow Jones industrial average fell sharply on last Wednesday as images of the rioting protestors were beamed onto the New York trading floor. Europe's stock markets suffered losses.
(The writer is an economist and columnist)