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Fears mount over need for third Greek bailout

A firefighter extinguishes a smouldering building in central Athens on Monday Feb. 13, 2012. Firefighters are dousing smoldering buildings and cleanup crews are sweeping rubble following a night of rioting in central Athens.

Dimitri Messinis/Dimitri Messinis/AP

As the Greek government congratulated itself for approving an austerity program that will unlock a second bailout, fears are already mounting about the recession-torn country's ability to avoid a third rescue package.

Even some of the members of parliament who voted for the bailout-for-austerity package as riots turned Athens into a fiery war zone are not convinced the worst is over. "I have my serious doubts whether this will work," Kryiakos Mitsotakis, the Nea Demokratia MP who is a former venture capitalist and economic analyst, said in an interview in Athens Monday.

"Debt that is 120 per cent of GDP is too high."

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Greece's debt to gross domestic product ratio is actually 160 per cent – the highest in Europe – and is merely forecast to come down to about 120 per cent by 2020, assuming the €130-billion ($170-billion) bailout and a parallel sovereign debt "haircut" are put in place by March 20. That's when Greece must redeem €14.5-billion of bonds, an impossibility without the bailout.

The shrinking debt scenario is built on assumptions that Greece's ever-deepening recession will end soon and that growth, however tepid, returns. But even 120 per cent is considered unsustainable by many economists. They note that Italy, a far healthier economy than Greece, is struggling with a similar debt ratio.

For Greece, the bailout is not quite a done deal. Greece must still come up with another €325-million in spending cuts to satisfy the "troika" – the European Commission, the International Monetary Fund and the European Central Bank. Euro zone finance ministers must then ratify the bailout. The troika is insisting that Greek political leaders take the unprecedented step of providing written assurances that they will push through the austerity and economic reform programs. Most previous assurances were not met.

If all these conditions are agreed, Athens will receive €130-billion in fresh loans, allowing the government to stay open for business. At the same time, a bond swap with private holders of Greek debt (mostly the banks) will see the national debt fall by about €100-billion. The package – the austerity and reform programs, the bailout and the bond "haircut" – are designed to put Greece back on a sustainable economic footing.

Many economists and more than a few politicians think the ambitious package won't do the trick, given the deteriorating economy, the popular backlash against the austerity programs and the lack of success in implementing the previous cutbacks and reforms.

"Getting financial support through bailout 2.0 will not magically solve all Greek problems," ING economist Paolo Pizzoli said in a note published Monday. "The big question mark relates to when Greece will be able to return to positive economic growth. We reckon this will unlikely materialize before [the second half of 2013] a long time framework over which Greek citizens might get increasingly disaffected to the adjustment package (they already are) and to those imposing it."

Other economists doubt Greece will be able to return to growth that quickly. Greece is about to enter its fifth year of recession. The economy contracted by 6 per cent in 2011 and even the rosiest forecasts call for a 3 per cent downturn this year.

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The doubters note that Greece is running a hefty current account deficit and that 70 per cent of the Greek economy is based on consumption, as the manufacturing base has been largely eradicated. Since taxes on everything from gasoline to property are rising sharply, and incomes are coming down – the minimum wage is to fall 22 per cent in the new austerity plan – buying power is plummeting. The economy is sinking with it. Meanwhile, unemployment, at almost 21 per cent, is at a record high.

A Greek economist, who did not want to be identified, said he had no hope that the economy could return to growth any time soon because too much emphasis is being put on tax hikes and spending cuts and not enough on economic reform, such as freeing up the labour markets, reducing bureaucratic red tape and making it easier to be an entrepreneur.

He said tax increases have been more aggressive than planned, while efforts such as deregulating markets and breaking up closed professions have essentially gone nowhere, because politicians do not want to confront the unions. "A third bailout is likely, yes," he said.

Mr. Mitsotakis, the MP, said he was somewhat optimistic that new austerity package will deliver results because it is weighted more to reform than spending cuts and tax hikes. But he said there are no assurances the reforms will be completed, given the government's grim execution record. "Bad execution created distrust among our EU partner and that led to a punitive approach – we cannot be trusted," he said.

He is not convinced a third bailout is inevitable. But he thinks there is a good chance Greece will require a second "haircut" on its debt or will have to pray that Germany approves the issuance of euro bonds. Such bonds would allow distressed countries like Greece and Portugal to lower their funding costs by piggybacking on Germany's triple-A credit rating.

Mike Lenhoff, a strategist in London with investment manager Brewin Dolphin, had a succinct view of Greece's bailout-for-austerity deal. He said "it may all be buying time." But given that Greece burned through its first bailout, worth €110-billion, in less than two years, time is not on its side.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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