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Does the Greek Deal Go Far Enough?

Author: Christopher Alessi
Updated February 13, 2012

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The Greek parliament passed fresh austerity measures (NYT) February 13, paving the way for a new $170 billion EU-IMF bailout. The development comes amid growing doubts that such a deal will be sufficient to rein in Greece's moutain of debt, and mounting public unrest that saw around 80,000 Greeks take to the streets of Athens in violent demonstrations over the weekend.

The European Central Bank said February 8 that it is prepared to exchange some of its holdings of Greek debt at a price below face value (WSJ), though other sources said ECB officials remained divided (Reuters) over how to aid a Greek restructuring. The potential decision by the ECB, the largest holder of Greek sovereign debt, could reduce the Greek debt burden by around $14 billion. However, the concession is contingent upon EU and IMF approval of the new bailout, which is expected in early March, and Greek leaders determining a $130 billion debt write-down agreement with private creditors.

What's at Stake

Greece has to repay around $19 billion in a March 20 bond redemption, and if it fails to secure further EU funding by then, it will undoubtedly face a disorderly default. Such a scenario would likely signal Greece's exit from the eurozone, with potentially significant knock-on effects for European banks.

The Greek government has been locked in negotiations with its private creditors for weeks, and has still failed to agree on the terms of an approximately 70 percent haircut. But the consensus reached by Greek Prime Minister Lucas Papademos and his coalition partners Thursday is expected to facilitate a deal with private investors.

The Debate

The IMF has said repeatedly in recent weeks that the private sector haircut will not be enough to enable the Greek government to reduce its debt burden from 160 percent to 120 percent of GDP by 2020--an IMF-mandated target to make the Greek debt burden sustainable in the long term (Bloomberg)-- and has called on Greece's official creditors to sustain sacrifices. It is a move Germany has vehemently resisted, but one that the ECB appeared poised to embrace following its announcement on Wednesday.

Still, an increasing number of analysts and policymakers doubt that the rescue terms being negotiated will be enough to set Greece on the road to fiscal soundness. "The idea that the country can be freed from its debt quagmire through austerity programs and aid pledges tied to conditions just isn't going to work," argues Der Spiegel's Stefan Kaiser. He says the only way out of its sovereign debt crisis is for Greece to go bankrupt--a course that would require private bondholders, European countries, and the ECB to incur significant losses beyond those now being contemplated.

EU leaders, including European Commissioner Neeli Kroes and Dutch Prime Minister Mark Rutte, have indicated that the euro could survive a Greek exit (BBC). However, German Chancellor Angela Merkel has warned of "unforeseeable consequences" for the eurozone if Greece were to drop the euro.

Policy Options

The discourse over eurozone policy has begun to shift gradually from one focused entirely on austerity to a more growth-oriented approach. Jean Pisani-Ferry, the director of Brussels-based think tank Bruegel, says the ECB could help facilitate growth in countries weighed down by austerity by cutting its policy rate and "triggering more external demand."

The Peterson Institute for International Economics' Jacob Funk Kirkegaard argues that southern European countries need to implement labor reforms that create more competition in the job market. Similarly, Italian Prime Minister Mario Monti recently proposed a plan to authorize the European Commission to sanction EU states that violate the single market to ensure a level playing field (WSJ) that could boost growth.

Background Materials:

Time is running out for the Greek government, which needs to reach a deal on unpopular austerity measures if it is to secure a second EU-IMF bailout, explains this Der Spiegel analysis.

Greece has been on the brink of a debt crisis since its inception, argues Yanis Varoufakis of the University of Athens in this Deutsche Welle "Transatlantic Voices" column.

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