EU, Greece reach deal to stave off default
posted at 9:20 am on February 21, 2012 by Ed Morrissey
If this seems like deja vu, it only means you’ve been paying attention:
After months in which Greece teetered on the verge of bankruptcy, European officials agreed Tuesday to give the country a second massive bailout in exchange for harsh austerity measures, as grim new estimates about the country’s economy pushed off a resolution until what some officials called the last possible day to reach one.
The decision buys time for the Mediterranean country to try to fix its staggering problems, and gives assurances to the world that a Greek default — and its possibly disastrous ripple effects — will be forestalled, at least for now. If Greece had been cut loose, it would have defaulted in late March, and doubts about the viability of larger countries such as Spain and Italy might have grown.
Under the terms of the deal, private bondholders will take a larger loss than had previously been planned in an attempt to get Greece’s debt to what European officials consider a sustainable level by 2020. The officials also agreed to reduce the interest they charge Greece for the long-term loans.
We’re saved! Er … again. And like the last bailout, the markets seem to believe that this won’t solve the problem of Greece in the long run, either:
After 13 hours of talks, euro zone ministers finalized a 130 billion euro ($172 billion) agreement after forcing Athens to commit to unpopular budget cutbacks and private bondholders to accept deeper losses, ensuring the government can meet a debt repayment due next month.
The deal was offset by worries the austerity plan will severely weaken Greece’s already shrinking economy and make it harder to repay its debts. The sharp cuts in the value of bonds held by private creditors also mean it will be hard for the country to borrow from capital markets again.
“There seem to be some reservations really about possibly the implementation near term … and the parameters that we saw in the package overall are not that far from what the market really expected,” said Adam Cole, global head of currency strategy at RBC Capital Markets in London.
“There are still some hurdles to get over in terms of the degree of private sector participation and whether or not that means that the Greek government has to use the collection action clauses that it’s setting up in the next few days. And that uncertainty will overhang the markets for a couple of weeks,” he added. He noted that waiting for ratification by some individual parliaments will also weigh.
The problem Greece has is that it shouldn’t be borrowing from capital markets at all, not with its debt ratio above 100% of GDP. The austerity measures should have taken place long before the first bailout and the government forced to produce a surplus to lower its debt load. The Greeks didn’t have the strength to follow that path when it could have saved them a lot of the pain they must endure now, and it’s far from clear that the Greeks will remain committed to that painful path of fiscal discipline in the near term, let alone the necessary long-term approach needed to gets its fiscal house in order.
The UK got that message a couple of years ago, and today announced that they have generated their largest monthly surplus in four years, thanks to their own austerity program. How did the opposition react to this success? By calling for an end to the austerity program:
Britain looks set to beat its own deficit-cutting target this year as local spending cuts helped the government to post the largest budget surplus in four years in January, safeguarding the country’s top-notch credit rating.
The figures will provide relief to Chancellor George Osborne after Moody’s warned last week that Britain could lose its triple-A rating if anaemic growth undermined its tough austerity programme.
Tuesday’s data fuelled calls for Osborne to ease back on austerity. The Labour party as well as some politicians within the coalition government have called for tax cuts to boost growth – but analysts said big giveaways in next month’s budget were unlikely as the road ahead remained tough.
Even the success is limited; the projection was that the UK would have an annual deficit of 8.4% of its GDP, and the surpluses will only dent that, not put the UK on a net-surplus path. And even that‘s too much for some of the British to bear. If the Greeks, the Brits, and the Americans can’t figure out that governments cannot borrow in massive amounts indefinitely, then there will be no bailout to rescue any of us.