After 13 hours of overnight talks ending Tuesday morning at 5 a.m., euro zone finance ministers put together the latest rescue package for Greece. “We have reached a far-reaching agreement on Greece’s new program and private sector involvement that would lead to a significant debt reduction for Greece…to secure Greece’s future in the euro area,” said Jean-Claude Juncker, who chairs the euro-group of finance ministers. It is a future emblazoned by one over-arching reality: the relinquishment of national sovereignty is the ultimate price that must be paid by any EU nation that cannot meet its debt obligations.
Thus it is no surprise that this deal, in which Greece will receive the latest tranche of rescue funds totaling $172 billion, requires the “enhanced and permanent” presence of EU monitors and European Commission, European Central Bank and International Monetary Fund representatives. Furthermore, Greece must pass legislation changing the country’s constitution in order to ensure that “priority is granted to debt-servicing payments,” which amounts to Greece depositing debt service funds into a “special account” aimed at guaranteeing repayments.
Why are the changes to the constitution and the so-called special account necessary? Greece’s next election is expected to be held in April, and these requirements eliminate the possibility that the Greek people might put politicians in office who would scuttle the agreement. It is no secret that many ordinary Greeks find the combination of wage and pension cuts, as well as the elimination of an additional 150,000 jobs to bring labor costs down by 15 percent over the next three years, unmanageable. As if on cue, yet another in a series of seemingly endless strikes has been scheduled for today by two of Greek’s biggest labor unions.
Anastasis Chrisopoulos, a 31-year-old Athens taxi driver, encapsulated the mood of a nation that has been buffeted for the last two years by this seemingly endless crisis. “Things will only get worse,” he said. “We have reached a point where we’re trying to figure out how to survive just the next day, let alone the next 10 days, the next month, the next year.”
Mr. Chrisopoulos has a partially valid point, as evidenced by an EU official who wished to remain anonymous. “We expect Greece to resume growth in 2014,” he told reporters. “We see a contraction of 4.5 percent this year and stagnation in 2013. That is a shrinkage of more that 17 percent over four years,” he added. That is not a “shrinkage.” That is a full-fledged depression, but it too must be tempered with a dose of reality: Greece’s minimum wage is still higher than either Portugal’s or Spain’s, and Greek labor costs have risen by more than 30 percent over the last decade, representing the biggest rise in the euro zone, according to EU data. For perspective’s sake, Germany’s labor costs have risen only 5 percent over the same ten years.
Yet as always, economic projections are little more than guesses, and the track record of such projections with respect to Greece is anything but reassuring. Greece’s 2011 deficit was “supposed to be” only 7.6 percent, a target set by the EU and IMF. The actual deficit was 8.5 percent, representing a difference of $1.9 billion. And one must keep in mind that such a missed projection represents the small picture. In May of 2010, Greece was given a $160 billion bailout that was ostensibly supposed to kick the proverbial can down the proverbial road for three years. Yet on June 17, 2011 the Washington Post revealed the accuracy of that prediction: “But a year later, the initiative has fallen so far short that the country is again running out of money.”
Thus the EU has been forced to cobble together bailout number two. Here are the details of the latest deal:
–Greece gets $173 billion in exchange for the aforementioned requirements.
–Banks, hedge funds, pension funds and other private investors who own around $265 billion of Greek government bonds have been asked to forgive 53.5 percent of the face value of those bonds, which would cut Greece’s current $460 billion of debt by $142 billion. The private creditor bond exchange is scheduled to take place on March 8th, and will be completed within three days. Greece’s next bond re-payment of $18 billion, due on March 20th, will also be restructured, allowing Greece to avoid default.
–Interest rates on the remaining debt will be reduced from the previous 4.8 percent to 3.65 percent, and Greece’s timeline to pay off those debts will increase from seven to 30 years.
–The European Central Bank (ECB), which is holding $65.5-72 billion of Greek bonds exempt from the write down, will send profits made on those holdings over the last two years to national central banks, whose governments will pass them on to Athens “to further improve the sustainability of Greece’s public debt.”
–if all goes according to plan, Greece’s debt ratio will be reduced from its current 160 percent of GDP to 120 percent of GDP by 2020.
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