European Pressphoto Agency
Over the last decade, Greece went on a debt binge that came crashing to an end in late 2009, provoking an economic crisis that has decimated the country’s economy, brought down a government, unleashed increasing social unrest and threatened both Europe’s recovery and the future of the euro.
Since a change in government revealed the true size of the country’s massive deficits, Greece has been kept afloat by its fellow euro zone countries, but at a steep price: the austerity measures demanded by France and Germany in return for two massive bailout packages have ripped holes in the Greek safety net and plunged the country into a recession of near-Great Depression dimensions.
After long resisting the idea of a default, European officials in March 2012 helped Greece negotiate a landmark debt restructuring deal with the vast majority of its private sector lenders, who agreed to swap $77 billion in Greek debt for new bonds worth as much as 75 percent less. It was the largest default in history.
The deal cleared the way for the so-called troika — the European Union, the European Central Bank and International Monetary Fund — to begin releasing funds from the second, 130 billion euro ($163.4 billion) bailout package, avoiding an uncontrolled default. But many economists said it still left Greece saddled with unsustainable debts and little prospects for growth.
While Greece receives billions of euros in emergency assistance from the lenders overseeing its bailout, almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets.
The European bailout that was supposed to buy time for Greece is mainly servicing only the interest on the country’s debt — while the Greek economy continues to struggle.
In early May, voters upended the country’s political system in a parliamentary election that saw the crushing defeat of the dominant political parties they blamed for Greece’s economic collapse. Parties representing the left and the far-right made gains, as Greeks protested the austerity pact. After the leading parties failed to form a coalition, a caretaker government was installed until new elections in June.
New Government Ushered in After a Critical Election
On June 20, 2012, Greece ushered in a new coalition government that will put it back at Europe’s bargaining table, ending a seven-week leadership vacuum that had destabilized this already fragile nation and cast a shadow over the future of the entire euro monetary union.
Antonis Samaras, the leader of the center-right New Democracy party that won critical parliamentary elections on June 17, was sworn in as prime minister.
Together with the Greek Socialist party known as Pasok and the Democratic Left, a small party that won only 16 percent of the vote, Mr. Samaras is maneuvering to form an airtight majority coalition in Parliament that he hopes will resist opposition from the popular far-left Syriza party, which has said it will fight if the new government does not repudiate the most onerous terms of Greece’s loan deals.
Mr. Samaris had supported the bailout as part of a government of national unity. But after the May elections, in which New Democracy and Pasok suffered a drubbing while Syriza made big gains, Mr. Samaris has said he will seek to soften the deal’s terms. But without big concessions from a so-far unyielding troika, Mr. Samaris will be forced to make massive spending cuts almost immediately, raising questions about how long his government might survive.
More on the Pivotal Parliamentary Elections
Official projections showed New Democracy with 30 percent of the vote and 128 seats in the 300-seat Parliament. The leftist Syriza party, which had surged on a wave of anti-austerity sentiment and spooked Europe with its talk of tearing up Greece’s loan agreement with its foreign creditors, was in second place, with 27 percent of the vote and 72 seats. Syriza officials had rejected calls for a coalition, ensuring its role as a vocal opposition bloc to a new government.
While the election afforded Greece a brief respite from a rapid downward spiral, it was not likely to prevent a showdown between the next government and the country’s so-called troika of foreign creditors — the European Commission, the European Central Bank and the International Monetary Fund — over the terms of a bailout agreement.
Spain’s Bailout Raises Worry Over Greece
The question of aiding Greece is complicated by the weakness of Spain, which in June received a pledge of up to $125 billion in European aid to bail out its banks, and of Italy. A Greek exit from the euro would raise the odds of market panics elsewhere. But Germany in particular worries that leniency with Greece will lead to new demands for aid by other struggling countries.
Background
In late 2009, the new government of Prime Minister George A. Papandreou announced that it had discovered that its conservative predecessor had falsified budget figures, concealing a swollen debt that was growing rapidly in the wake of the global economic meltdown.
The roots of the crisis go back to the strong euro and rock-bottom interest rates that prevailed for much of the past decade. Greece took advantage of this easy money to drive up borrowing by the country’s consumers and its government, which built up $400 billion in debt, much of it lent by banks in France and Germany.
When the global economy crumpled, those chickens came home to roost.
After the revelation of the true size of its deficit, Greece was quickly frozen out of the bond markets, and in May 2010 began to rely on an aid package of €110 billion, or $152.6 billion, agreed to by its richer European neighbors.
The price was a series of austerity measures meant to cut the country’s bloated deficit and restore investor confidence. Greece cut the pay of its public workers — a quarter of the work force — by 10 percent — but continued to miss deficit targets as its economy sank deeper into recession, shrinking by an estimated 5.5 percent in 2011.
Throughout 2010 and 2011, investors continued to demand ever higher interest rates for Greek borrowing as the market appeared to conclude that some sort of default was inevitable. Mass demonstrations turned violent in October 2011 as Parliament barely passed additional austerity measures Europe demanded to keep the bailout money flowing.
Also that month, European leaders won agreement from banks to reduce some of Greece’s debt by 50 percent. But the conditions coming along with the aid plunged Athens into turmoil, and in November, Mr. Papandreou decided to step down. Lucas Papademos, an economist and former vice president of the European Central Bank, was named prime minister and assembled a temporary government of national unity that pledged to quickly approve the tough terms of a second European aid package of $150 billion.
Tensions in the Euro Zone
For Greece — and for Spain, Italy, Ireland and Portugal — the financial crisis has highlighted the constraints of euro membership. Unable to devalue their currencies to regain competitiveness, and forced by E.U. fiscal agreements to control spending, they are facing austerity measures just when their economies need extra spending. Other economies like Germany, the Netherlands and Austria have kept deficits down while retaining an edge in global markets by restraining domestic wage increases. France lies somewhere between the two camps.
The chief difficulty in working out a package to support Greece was the popular sentiment in Germany — deeply concerned about becoming the answer to the debt problems of all of Europe’s endangered economies — that Greece should pay a penalty for its former profligacy.
Since the euro’s inception in 1999, no member had sought support from the I.M.F., which typically comes to the rescue of emerging-market economies rather than developed countries. Beside unsettling the markets, Greece’s troubles have undermined the common currency it and 15 and other European nations share.
Meanwhile, questions were widely raised about the role played by banks, including Goldman Sachs, in constructing elaborate financial deals that helped the previous government hide the extent of its deficit.
Bond Losses, Second Bailout Package
By early 2012, the sense of crisis had returned, as the leaders of France and Germany threatened to withhold the second aid package without further cuts and promises of structural economic changes. Greece plunged into meetings with banks and hedge funds about deeper writedowns on its debt.
With elections looming in the spring, the parties that make up Mr. Papademos’s coalition feared that they were essentially being told to commit political suicide to save the country, and one party to the alliance bailed out. But with an uncontrolled default seeming unthinkable, the government shrugged off violent demonstrations and hurried to pass the necessary legislation.
The European Union’s plan of tax increases, spending cuts and wage cuts pushed the country into a deep recession; the economy shrunk by almost 12 percent between 2009 and 2011 and is expected to shrink by up to 6 percent in 2012. The crisis also stripped Greece’s political center, weak to begin with, of its last shreds of political legitimacy. With unemployment at 21 percent, businesses closing, credit scarce and the proposed new wage cuts expected to further decimate the shrinking middle class, the hard left and extreme right are rising.
In early February, Mr. Papademos reached a deal to support the new austerity measures with two of his coalition members, the Socialists and New Democracy, a center right party. The right-wing party, Popular Orthodox Rally, balked, but is too small to block the deal, which includes a 22 percent cut in the benchmark minimum wage and cuts of 150,000 public sector layoffs. Greek workers responded by walking off the job for the second general strike in a week.
Street demonstrations in Athens turned violent, and 80,000 people marched in protest the day before Parliament approved the package on Feb. 13.
On Feb. 21, after more than 13 hours of talks in Brussels, European finance ministers approved a new bailout of 130 billion euros, or $172 billion, subject to Greece taking immediate steps to put the deep structural changes that they agreed to into effect.
The agreement included a reduction in interest rates on loans from Greece’s first rescue in 2010, and European central banks foregoing profit on their Greek bond holdings, that allowed the deal to satisfy a mandate set by the International Monetary Fund that Greece’s debt come down to 120.5 percent of gross domestic product by 2020.
The bailout cash is likely to be paid into a special “escrow” account that will prioritize debt servicing before money is released to general government coffers.
Though Greece may have dodged a default with its last-minute bailout deal — it faced payments it would not be able to make on March 20 — longer-term doubts over its ability to repay its staggering debts remained, raising questions about whether even more rescue money will eventually be needed.
It is uncertain if another round of austerity can bring Greece to a point whereby it generates enough revenue to pay off its obligations — even if the private sector debt deal goes through — and return to the market on its own.
The Debt Deal
In early March 2012, Greece announced that it had clinched a landmark debt restructuring deal with its private sector lenders. The deal clears the way for the release of bailout funds from Europe and the International Monetary Fund that will save the country from imminent default.
The Greek finance ministry said that 85.8 percent of private creditors holding 177 billion euros in Greek bonds participated in the bond swap. After invoking collective action clauses, provisions that will force the holdouts to accept the offer, the participation rate would rise to 95 percent and meet the target set by Europe and the I.M.F. for the release of crucial rescue funds.
The ministry also said that 69 percent of investors holding a category of Greek bonds issued under laws other than Greek law had agreed to the exchange — or about €20 billion worth. This figure was much higher than anticipated because many of these investors were expected to either challenge Greece in court or hold out for better terms.
For Greece, the better than expected numbers highlights the success of the aggressive legal strategy to force bond holders to take up the exchange even though they would accept a big loss in the process. Seen at first as a risky gambit that could end up badly, the take-it-or-leave-it approach — mixed in with tough rhetoric from public officials in Greece and Europe — proved to be highly effective as it forced even the most reluctant investors to tender their bonds.
The value of Greek 10-year bonds had shortly before hit a record low of 16 cents on the euro.
When the bailout was finalized on March 14, European officials said that if the reform program is successful, Greece’s debt level by 2020 could equal 116.5 percent of gross domestic product.
However, European officials said that Greece needed to do more to crack down on tax evasion. While acknowledging that Greek authorities made strides in 2011, collecting 946 million euros ($1.2 billion) in back taxes, Horst Reichenbach, the head of the European Commission’s task force on Greece, said it was a fraction of the potential in Greece, where tax evasion is endemic.
Concern Grows in Greece Over the Bailout
Even as the European Union signed off on the bailout deal for Greece, many people in Athens saw no end to their country’s woes.
The deal was reached amid a growing air of stalemate and concern. Greece’s foreign lenders expressed doubts that the new austerity measures the Greek Parliament passed — including a 22 percent cut to the private-sector benchmark minimum wage — would actually be carried out, at least before early national elections in the spring.
Others were concerned that in the fine print of the 400-plus-page document, Greece relinquished fundamental parts of its sovereignty to its foreign lenders, the European Commission, the European Central Bank and the International Monetary Fund.
While their country’s fate was being decided in abstract, high-level negotiations, many Greeks said they had begun to feel that the debt writedown and new loan is aimed at saving the banks more than the country and its citizens.
Privately, Greek and European officials said they did not believe that Greece’s increasingly weak political class would have the will or the time to carry out the new austerity measures, which they say require complex legal expertise and cooperation among ministries in a state that lags in administrative capacity.
The May 2012 Elections
In the May vote, the center-right New Democracy gained 111 of Parliament’s 300 seats, and the socialist Pasok party won 42. The Coalition of the Radical Left, called Syriza, which opposed the terms of Greece’s agreement with its foreign lenders, won 50 seats, dominating in all major metropolitan areas. In a sign of the depth of the social turmoil here, the far-right Golden Dawn party, whose members perform Nazi salutes at rallies, pulled in 6.8 percent of the vote — compared with less than 1 percent in 2009 — enough to enter Parliament for the first time with 21 seats.
The vote raised fears across Europe that Greece would back away from the debt deal, which requires that a new round of budget cuts equal to 5 percent of GDP be adopted in June. A second default by Greece could undermine banks across the continent that hold its debt.
One by one, the leaders of the chief parties tried and failed to form a coalition, as the leader of Syriza, Alexis Tsipras, said that he would not work with either New Democracy or Pasok unless their leaders repudiated their support of the debt deal. President Karolos Papoulias made a last-ditch appeal for the parties to form a unity government, but that also failed.
Instead, there has been an interim government until a a new round of elections set for June 17. Three polls published June 1 in Athens showed Syriza and the New Democracy party basically tied, while one put Syriza slightly ahead of the conservatives. Those were the last surveys expected before the June 17 balloting, as Greek law prohibits opinion polls in the two weeks before general elections.
Leaders in Germany and elsewhere in Europe made clear that as far as they were concerned, a Greek departure from the euro was no longer unthinkable — and far more likely than additional aid.
And depositors were voting with their feet, pulling billions from Greek banks to protect against the losses that would accompany a switch to a depreciated drachma. The head of the new caretaker government said the central bank had warned of “a great fear that could develop into a panic.”
Fear of ‘Drachmageddon’
In the weeks following the May 2012 elections, talk of “drachmageddon” could be heard in conversations all around Athens — despite the fact that 80 percent of Greeks said they wanted to stay with the euro.
Any departure from the euro, if it did occur, would not come quickly, even if a new government repudiates Greece’s bailout terms; orchestrating the exit would be legally complicated and lengthy. European leaders may also move to prevent a Greek default or exit at the 11th hour, considering the almost unending uncertainties.
But few people are taking chances.
Big tourism operators like TUI of Germany and Kuoni of Britain are demanding the addition of so-called drachma clauses to contracts with Greek hoteliers should the euro no longer be in use. British newspapers are filled with advice columns for travelers worried about the wisdom of planning a vacation in Greece, or even Portugal and Spain, should the euro crisis worsen. Large multinational companies like Vodafone Group, Reckitt Benckiser and Diageo have taken to sweeping cash every day from euro accounts back to Britain to limit their exposure.
But coming up with a Plan B is proving difficult for Greek businesses, especially smaller ones. There are so many unknowns involved that many of them cannot even conceive of how they would cope. Economists say the drachma would be devalued by an estimated 50 to 70 percent compared to the euro.
Tens of thousands of Greek businesses could collapse from one day to the next, said Constantine Mihalos, the president of the Athens Chamber of Commerce and Industry. Around 85 percent of Greek companies employ fewer than 10 people, and many are already near bankruptcy as the Greek economy nose-dives and bank credit dries up.
With a devalued currency, inflation would rise rapidly, and Greek companies would struggle to pay the euro-denominated bills of their suppliers. Trade with other countries would slow sharply for a while, as suppliers halted deliveries, further crippling Greek businesses that depend heavily on imports.
Even large Greek exporters who might benefit from a devalued currency are opposed to a return to the drachma, fearing damage to the country’s image as a place to do business.
The troubled Greek banking system, which is already running on fumes, would face a serious run as depositors pulled their funds. An estimated 250 billion euros, or about $315 billion, has already left Greek banks since the crisis first broke open three years ago.
The International Monetary Fund estimates that a Greek exit from the euro would lop more than 10 percent from Greece’s gross domestic product for at least the first year after a return to the drachma.
After that, the thinking goes, a new dawn would break, as the weakened Greek currency lowers the cost of Greek labor and products like olive oil. As was the case in Argentina, businesses and consumers in other countries would eventually start buying Greek goods and services once they improved in value.
Aside from shipbuilding, most of Greece’s industrial base has eroded in the 30 years since the government nationalized large areas of industry following a seething civil war. Wealth-generating businesses diminished, and tens of thousands of laid-off workers were absorbed by the state to reduce unemployment.
Today, Greek exports of manufactured products account for only 10 percent of gross domestic product, compared with a 30 percent average for the rest of the euro zone. In addition, Greece’s adoption of the euro hastened a steady shift away from agricultural production. Today, Greece imports nearly 40 percent of its food, most of its medicine and almost all of its oil and natural gas.
The New York Times
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