21 Feb 2012

Are Greeks’ euro days numbered?

As Greece is handed a new 130bn euro lifeline, Channel 4 News asks whether it will stave off collapse – and what the deal means for the Greek people.

The latest rescue package – the second since the financial crisis began – was agreed between eurozone governments in Brussels.

But eurozone ministers want to ensure they can still get their pound of flesh in return for the deal, in which 100bn euros of privately-held debt are written off and 30bn euros are loaned as Greece attempts to rebuild its economy virtually from scratch.

The bailout is entirely dependent on a severe austerity package of pay, pension and jobs cuts, and savings of 325m euros in this year’s national budget. It is aimed at bringing Greece’s debt down to 120.5 per cent of GDP by 2020.

Moving target

“I rather doubt it will work,” Dr Michael Taylor, senior editor for Europe at global analysis firm, Oxford Analytica, told Channel 4 News. “The bottom line is that the economy keeps going downhill, so how are they going to get a surplus to pay back creditors?”

The problem, Dr Taylor said, is that the Greek economy is shrinking. With debts standing at around 360bn euros, as austerity measures begin to bite and the economy only shows signs of shrinking further, the debt to GDP ratio will only get worse.

So it is a deal which buys time, but not for good, Dr Taylor said. “This deal has knocked off debt, but even that only brings them down to 120.5 per cent of GDP. That’s still massive. Countries like the UK and France have a debt of around 70 to 80 per cent of GDP, and that’s considered risky.

“We are looking at a situation where austerity itself is reducing domestic demand, the measures are going to put a brake on the economy. Consumers will not be able to spend. Economic activities are going to go on a downwards spiral. GDP is like a moving target. So everyone’s frightened of what the future holds.”

He is not alone in his concerns. Former chancellor Alistair Darling, who has said the Greeks should be allowed to default, has said he is “very sceptical” about the Greek deal sticking. “Even if Greece manages to do everything that is asked of it, in eight years’ time they will still have a debt of 120 per cent of their GDP, and you have to ask whether a frail economy like Greece, whether or not that is possible or realistic, seeing Greece come through that,” he said.

Greek default?

So if the prospect of a default remains on the horizon, raising the possibility of Greece being kicked out of the euro, what can be done?

Dr Taylor said: “They may even get another bailout before too long to prevent them from defaulting. But it would set a bad example to Portugal and Spain.

“The difficulty is that every solution has a problem. What they need is a complete debt forgiveness, but then that’s seen to be allowing them to get off lightly. It’s what’s known as a moral hazard, and would have given the signal that their previous handling of the economy was acceptable.

“As to how long they will last in the euro, the election in April may determine that. There is a strong possibility a left-wing government might come in, and they have a strong policy of rejecting the IMF and the EU. They would be isolationist. Then they would have to pull out of the eurozone.”

As Greece appears to be moving closer towards this option, even with the latest bailout, what would happen then?

“They are in the mess they are in because they have been living in an unreal situation for decades. It’s going to take several years to recover.” Dr Michael Taylor, Oxford Analytica

If they were to leave the euro, either by pulling out, or by defaulting, “it is very difficult to work out what would happen,” Dr Taylor said. “Rather like with the collapse of Lehman Brothers, it was only after the whole thing played out that everyone realised how much money all the parties had. The bailout happened because Greece’s friends [in the eurozone] are helping them through this difficulty.”

It may not be long before Greece is back to using the drachma. A devalued currency may boost competitiveness, Dr Taylor said, by making Greek tourism more attractive, “but the trouble with tourism is that it depends on imports, which would be very expensive with a devalued drachma”.

Dr Taylor added: “They are in the mess they are in because they have been living in an unreal situation for decades. It’s going to take several years to recover.”