Europe’s Financial Pill Won’t Cure Greece

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On February 21 eurozone finance ministers agreed to a second bailout for Greece – it has received a 53.5% reduction of its debt to private banks and will get up to 130 billion euros from the International Monetary Fund.

On February 21 eurozone finance ministers agreed to a second bailout for Greece – it has received a 53.5% reduction of its debt to private banks and will get up to 130 billion euros from the International Monetary Fund.

The threat of default has been suspended but not eliminated. Experts admit that for the time being, all measures taken by euro officials are helping Greece to skirt the dangerous brink of the crisis but do not offer a system-wide resolution of its economic problems.

Now the Greek economy is like a terminally ill patient – doctors do not have it in their power to cure him, but they can prolong his life with medication, in the hope that some radical cure will be invented before his tragic end.

On Tuesday night the Eurogroup approved the provision of 130 billion euros to Greece, and instructed the private holders of the 206 billion euro Greek debt to write off 53.5% from the value of their bonds. The goal of this agreement is to reduce Greece’s debt to 120.5% of its GDP by 2020. Not all parameters of the agreement have been published yet but Angelos Tsakanikas, head of research at IOBE (the Fund of Economic and Industrial Studies), said that the adopted package of measures will prevent default for at least four to five years.

 

The Greek pill

 

EU doctors had a long discussion on whether to give Greece the rescue pill or not. The plan for a second bailout of Greece, whereby private investors would write off 50% of the debts of their own free will, appeared in October 2011, but its adoption was postponed several times. The Greek pill seemed too bitter for the rest of the eurozone. EU officials criticized the Greek authorities for a lack of resolve in implementing a tough budget policy.

Another problem – the inevitable grave consequences of the debt reduction – remained in the background.

Experts believe that if private banks, primarily French and German, reduce the debt by more than half, this is bound to create some holes in their balances and, hence, may have problems with their own creditors – companies and individuals. Some experts even predicted a potential crisis of the entire EU financial system.

Yury Danilov, director of the Center for Stock Market Development, said that for this reason the French and German governments and central banks thoroughly prepared for the restructuring of the Greek debts by injecting a big amount of liquidity into their financial systems.

“Apparently, the banks have already stocked adequate reserves for potential losses – they withdrew money from other markets and completed this pullout in November,” the expert explains. “On the whole, I think the French and German banks will make it through this period without substantial losses. In any event, the backbone banks will not collapse and might even manage without asking national banks for help once again.”

Some experts think that if more than half of the debt is written off, the Credit Default Swap (CDS) should come in force.

Yevgeny Nadorshin, a senior economist at AFK Sistema, notes that credit agencies and professional associations of players on the financial markets are discussing whether or not the debt reduction should be considered a default. The expert believes that “this situation corresponds to a default – the borrower cannot fully pay its debts and different procedures and tricks are required to help Greece remain solvent on its debt only.”

He believes that the adoption of the second bailout plan was so difficult because the rescue team was trying to decide how to launch it while avoiding huge CDS payments.

 

Right-wing reforms and a left-wing impasse

 

Practically all experts recognize that the main point is that the new package will provide the Greek economy with temporary relief, but will not cure it of its ailment.

“I think none of the EU measures – neither the first steps, nor the current measures nor any future moves – will be enough to rescue Greece once and for all. They won’t resolve the issue until negative processes in its economy stop and the country starts to develop.”

Neither domestic nor Western experts can confidently identify the growth points and drivers of the modern Greek economy.

Troika Dialogue Managing Director Yevgeny Gavrilenkov reasons: “What could encourage the Greek economy to grow? Greece needs enormous structural reforms – deregulation and higher efficiency.”

Experts cite large-scale privatization of property by foreign investors, including a big portion of the Greek coast, as one potential measure. Or Greece could withdraw from the eurozone, return to its drachma and devalue it – all things that the Greeks consider unacceptable.

Moreover, even the government’s tactical reforms – budget restrictions, savings, etc. – may encounter popular resistance, and nobody can predict whether it will have the guts to continue what it started.

“It is clear there will be protests, high social tensions and political uncertainty. It is not clear whether the Greek authorities will be able to cope with this,” Danilov notes. “There is no certainty that some left- or right-wing radical government will come to power and say – we don’t need all this; let’s get the drachma back and quit the eurozone.”

Considering the traditionally strong left-wing parties and movements, this option cannot be ruled out. However, the Greeks understand that there is no alternative to reduced spending and that default and withdrawal from the eurozone will only lead to a sharper decline in living standards.

"I think the majority of society does not want a default," Tsakanikas summarizes. "Even those who support this scenario do not understand what it means in reality."

The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

 

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