Oversupply of demands

The terrible dilemma facing Greece's lenders

Has Brussels pushed Greece too far? No, if the austerity demanded by the “troika” of the European Commission, European Central Bank and the International Monetary Fund is anything to go by in return for a second bailout worth euro 130 billion. Yes, if you sympathise with the strikers and protesters on Syntagma Square outside the Greek Parliament in Athens. Between the two extremes lies the fate of not just a small country but the future of the euro zone. Greece’s caretaker national government was told bluntly by euro zone lenders that it needed to do more than the euro 3.3 billion cuts it had brought to the table. While the country’s political class is largely behind the cutbacks, the nation remains bitterly divided about the extent to which its welfare state should be pruned. The euro zone’s finance ministers are due to meet this Wednesday to approve a revised deal, ahead of a euro 14.5 billion repayment that falls due in March — and involves a bond swap with the European Central Bank that will restructure Greece’s privately-held debt, entailing bond-holders to take losses of about 70 per cent. This elaborate arrangement is designed to halve the country’s debt to euro 100 billion and cut the burden from 160 per cent of gross domestic product to 120 per cent. Greece would thus have averted a sovereign default that would have been catastrophic for it, Europe and the world.

Still, it is worth wondering whether these strings-attached bailouts are merely postponing the inevitable. The stringent additional conditions that the “troika” imposed on Friday are the result of Greece reneging on earlier promises of cutbacks in public spending. Indeed, the clues to Greece’s future may lie in that very point; it has very little room left for manoeuvre. That is why commentators are increasingly questioning whether the imposition of more spending cutbacks would be helpful in the long run. Austerity measures as a result of the earlier euro 110-billion bailout plan have already taken a toll on the Greek economy, which has suffered five years of recession. The unemployment rate is over 20 per cent against 13-odd per cent in November 2010 and industrial output in December 2011 fell 11.3 per cent year-on-year. Further recession will crimp Greece’s ability to service future debt. Greece needs to grow itself out of trouble; if a cash-strapped government is unable to do what is necessary, fiscal or otherwise, to stimulate growth, then a long-term solution of the Greek problem seems ever more distant.

At the same time, with debt crises in Italy, Portugal and Spain to deal with, it is politically unfeasible for the European leadership, led by German Chancellor Angela Merkel, to countenance a no-strings-attached bailout. Some analysts see the only way out of the deadlock is for private bond-holders to agree to sharper haircuts. The alternative would be a default and Greece’s exit from the euro zone, which would threaten the very existence of the euro.