Bond deal brings Greece little comfort

 

ATHENS The Greek government is claiming a major success. The risk of immediate default has been avoided.

In the largest restructuring of debt in history, 85% of private investors have agreed to take steep losses on their holdings of Greek debt. They will lose more than 70% of their investment. They accepted - in the end - that this was a better deal than allowing Greece to go bankrupt, in which case they would have lost everything.

This agreement with private investors is an essential part of Greece's second bailout. It paves the way for the EU and the IMF to sign off on a 130bn-euro (£110bn; $173bn) rescue package. Greece, which was facing bankruptcy within two weeks, can breathe again.

Athens and EU flag What went wrong in Greece?

What went wrong in Greece?

An old drachma note and a euro note
Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.

What went wrong in Greece?

The opening ceremony at the Athens Olympics
Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.

What went wrong in Greece?

A defunct restaurant for sale in central Athens
The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.

What went wrong in Greece?

A man with a bag of coins walks past the headquarters of the Bank of Greece
Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.

What went wrong in Greece?

Workers in a rally led by the PAME union in Athens on 22 April 2010
There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.

What went wrong in Greece?

Greece's problems have made investors nervous, which has made it more expensive for other European countries such as Portugal to borrow money.
Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.

What went wrong in Greece?

Greek Prime Minister George Papandreou at an EU summit in Brussels on 26 March 2010
In 2010, the EU, IMF and ECB agreed a bailout worth 110bn euros (£92bn; $145bn) for Greece. Prime Minister George Papandreou quit the following year while negotiating its follow-up.

What went wrong in Greece?

Lucas Papademos
Lucas Papademos, who succeeded Mr Papandreou, has negotiated a second bailout of 130bn euros, plus a debt writedown of 107bn euros. The price: increased austerity and eurozone monitoring.

What went wrong in Greece?

Crowds
In May 2012 elections a majority of voters backed parties opposed to austerity, but no group won an overall majority resulting in political deadlock. Fresh elections have been called in June.
BACK {current} of {total} NEXT

Those investors who held out will be forced to participate. Because they would not be accepting losses on a voluntary basis it is quite possible that this will be judged a "credit event", which could count as a technical default. That, too, could trigger pay-outs of insurance, called credit default swaps (CDS). Even if it happens the ability to damage the market is less than it was. It remains, however, an unpredictable factor.

The focus will now shift to Greece itself. Its debt mountain - currently standing at 360bn euros and rising - will have 107bn euros lopped off the total.

The country will still be left with debts of 250bn. The economy is in the fifth year of recession. The earliest anyone predicts growth is 2014.

Another round of spending cuts - which was a condition for this latest bailout - will only weaken demand further. Unemployment is rising sharply. It has shot up to 21%. There are many who believe Greece is locked in a cycle of decline.

In this atmosphere the country will soon turn to politics. Elections are due in April or early May. The mood in the country is sullen and resentful. The parties that negotiated this bailout may not be rewarded. Parties from the far left and right are seeing their support increase. If successful at the polls these politicians they may not feel bound by the bailout conditions.

Foreign intervention

Greece has become a laboratory for austerity. Never, in recent times, has an economy of a Western country shrunk so fast - 16% in just four years. Its politicians are held in low regard. There is humiliation and shame that the running of the economy has largely been handed over to outsiders.

Many see Greece as little more than a protectorate of the EU. It is widely believed that the purpose of the bailout was less about helping Greece and more about saving the euro and protecting international banks from a default.

The unanswered question is where the growth will come from to bring down the remaining debt. There are plans to free up the labour market, to open up closed professions, but there is huge resistance. Some government assets may be sold off, but that will take time. The EU - after the Greek elections - may decide to throw in some funds that lie unused in one of its accounts.

The Greek government, time and again, has told the people that they face a choice. Leave the euro and face chaos and catastrophe. Or accept austerity and build a different future. The Greek people have largely accepted that argument.

But staying in the euro involves years of hardship and social tension. The best will emigrate, as they are doing already. The signs are everywhere of poverty, social break down, and homelessness.

It cannot be taken for granted that the Greek people will accept the medicine prescribed for it. That is why the Greek crisis is far from over.

 
Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

Scotland's vote weighs on Europe

A Scottish Yes vote would pose a big challenge to EU membership rules, Europe editor Gavin Hewitt writes.

Read full article

More on This Story

Global Economy

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    0

    Comment number 198.

    “I use emotion for the many and reserve reason for the few” A Hitler

  • rate this
    0

    Comment number 197.

    196"Why all of this anti American comment?"

    Because deep down they know when the going gets really tough and they will need gifts of food from the USA, they will have to eat our Frankenfood. What if they turn out to be right and all of us in the US are slowly turning into mutants from it.They'll be next to share our fate. I don't think we'll ship the makings for Haggis though, maybe Mars Bars

  • rate this
    0

    Comment number 196.

    Why all of this anti American comment?.
    When the going gets tough I would rather be with the Yanks than any of our supposedly European allies.
    We should support our true allies - even if they make mistakes occasionally - as we all do sometimes.

  • rate this
    -1

    Comment number 195.

    I think the EU and in particular the European Commission have learned a lot from the mistakes of the beginnings ( including the actual woes of Greece ).
    I assume the future strategy will be more prudent.

  • rate this
    0

    Comment number 194.

    Regardless of the responsibility that Greek politicians and civil servants share with the eurozone hierarchy for this situation, this is a time of shame for the eurozone and the eu.
    A protectorate of the eurozone perhaps more than the eu, but no longer a state, just Greeks being farmed for loan repayments.
    A chilling sign of what the eu is really about and for whose benefit.

 

Comments 5 of 198

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.