Greece has pulled back from the brink of collapse, but still faces the real threat of an eventual credit default that could easily plunge the euro zone into bedlam.
Prime Minister George Papandreou's socialist government won a crucial parliamentary vote Wednesday to support a €28-billion ($39.2-billion) austerity program. Mr. Papandreou's 155-138 vote victory opens the door to a fresh bailout from the European Union and the International Monetary Fund, which had made any new funds conditional on a "yes" vote, to be followed Thursday by approval of the legislation that would implement the severe cutbacks.
While the Greek government is optimistic about its future, its view seems at odds with everyone from economists to the thousands of protesters who have turned central Athens into a running battle zone. And while the vote removes the threat of an imminent collapse on bond payments, the severe austerity program threatens to push Greece deeper into a recession that all but assures an eventual default, economists and debt strategists warn.
"With the Greek economy in intensive care, the Athens government finally has a mandate it needs to prescribe more bitter medicine," said Max Johnson, lead corporate broker at Currency Solutions, a London foreign exchange firm. "The euro zone is now likely to approve a second bailout, but there's every danger that the medicine will kill the patient."
But Greece's Medium-Term Fiscal Strategy Report for 2012 to 2015, otherwise known as the austerity program, presents a surprisingly robust growth scenario despite the deep fiscal-crunching effort. The strategy is designed to reduce public expenditures from 51.4 per cent of gross domestic product this year to 44.4 per cent in 2015.
To get there, Athens plans, among other things, to reduce the public sector work force by 150,000 - equivalent to 20 per cent of the total - over the next four years; cut military expenses by the equivalent of 0.5 per cent of GDP; freeze pensions and raise retirement ages; hike taxes on virtually all income levels, including those earning only €12,000 a year; and boost the value-added tax from 13 per cent to 23 per cent on bars and restaurants. It also plans a €50-billion privatization program, with state assets from gold mining properties to ports headed to the auction block.
Despite the deepest spending reductions and tax hikes seen in any euro zone country since the launch of the common currency 12 years ago, the government expects its economy to grow 0.8 per cent next year and between 2.1 per cent and 2.7 per cent in each of the following three years.
The figures are optimistic compared to other forecasts. Deutsche Bank AG expects the Greek economy to contract by 0.4 next year. ING Bank expects marginal growth next year and growth of between 0.7 per cent and 1.5 per cent over the following three years, significantly below the official government forecasts.
Others think any growth is highly unlikely.
"Fiscal austerity with real GDP growth? How is this possible?" said Jason Manolopoulos, managing partner of Dromeus Capital and author of Greece's Odious Debt, a new book about the country's economic downfall.
Mr. Johnson said the austerity measures could backfire if struggling, low-income Greeks refuse to pay their taxes. "If that happens the prospects of a Greek default will go from the highly likely to the inevitable," he wrote.
Marshall Auerback, portfolio strategist in Denver with hedge fund Madison Street Partners, had a similarly negative view of Greece's ability to expand when every government budget is being gutted and employment, now officially at 16.2 per cent, is rising.
"There is no relief in sight as the EU elites continue to grind the nation into the modern day equivalent of a debtors' jail," he said in a recent note. "They seem to be incapable of understanding that if you savagely cut government spending while private spending is going backwards and the external sector is not picking up the tab, then the economy will tank."
Others note that Greece has a history of dubious economic forecasts, so the positive growth figures shouldn't come as a surprise. After Mr. Papandreou's government swept to power in the autumn of 2009, a year after the financial crisis hit, it learned that the previous government had fudged the deficit and growth figures for years. The next spring, Greece was unable to roll over its debt and took a €110-billion bailout from the EU and the IMF.
Investors seemed to share the view that Greece's return to growth is far from assured in the face of cutbacks. On Wednesday, after the austerity package was passed, the cost of insuring against a Greek default was unchanged. Reuters reported that ING models show that investors expect to receive only 60 per cent of the face value of any three-year bonds they hold to maturity.
Here are challenges and deadlines that Greece will need to meet in coming weeks:
Thursday, June 30
Parliament votes on legislation to implement tax hikes, spending cuts and privatizations in a €28-billion, five-year austerity package agreed to with the European Union and the International Monetary Fund. The morning session and is expected to conclude in the afternoon with a vote.
On Wednesday, parliament voted to approve the austerity plan in principle; Thursday's vote is on specific measures.
Sunday, July 3
Deadline set by the EU for the Greek parliament to pass the austerity laws. Euro zone finance ministers hold an extraordinary meeting on this date and have said the laws must be approved by then for Greece to obtain the next, 12 billion euro tranche of loans in its international bailout. Greece has said it will be unable to pay its debts by mid-July if it does not get the tranche.
Euro zone finance ministers have said they will define by early July "the main parameters" of a new international bailout plan for Greece, which will supplement the €110-billion bailout launched in May of last year. The new package will include additional official loans and a voluntary rollover of Greek debt by private investors.