Expect another Greek fudge
Oct 04, 2012
Greece made its bid for the next €32bn instalment of rescue funding this week. It submitted a draft budget for 2013 containing €7.8bn in spending cuts and savings. The ‘troika’ – the International Monetary Fund, the European Union and the European Central Bank – will release the money once it is satisfied with Greece’s budgetary plans for the next two years. Greece hopes to get its hands on the cash at an EU summit in mid-October following a positive progress report from the troika.
What the commentators said
This week officials were taking a close look at around €2bn of the €13.5bn savings package that is supposed to cover the next two years, and no wonder. Government plans to cut costs or reform the economy have “never produced what they were supposed to”, one official told The Wall Street Journal. “The creditors are fed up with empty promises.”
You can see why, said Der Spiegel. “It would be generous to refer to the Greeks’ approach to reforms as sluggish.” For one thing, many people evidently still seem to think that paying tax is optional. Then there was the privatisation programme, trumpeted as the biggest of all time. It was supposed to raise €50bn by flogging state-owned assets, but so far around €1.5bn has been collected.
Moreover, the worry is that the economy “is collapsing more quickly than Europe can mend it”, said the Wall Street Journal. Assuming Greece gets the money, the fear is that it will soon need more, or have to restructure its debt again. That’s because the growth assumptions underpinning the rescue look increasingly shaky.
“The vicious spiral of austerity is still working,” said Hugo Dixon on Breakingviews. Fiscal squeezes undermine growth and tax receipts, making the debt problem worse. The economy is set to shrink for a sixth year, leaving GDP about a quarter below its pre-crisis peak. The government expects the overall debt pile to reach 179% of GDP next year.
Even though its chances of ever getting on top of its debt look miniscule, Greece will probably be given more time or money. The consequences of a Greek default and exit from the eurozone look “incalculable”, as Der Spiegel pointed out. A key danger is a collapse of southern banking systems as capital flees to the north from countries that could follow Greece into default.
In any case, the rest of Europe “is terrified” at the potential “domino” effect of a ‘Grexit’. So even though Greece hasn’t met the troika’s terms, “I suspect some fudge will be agreed in the end”, said Ben May of Capital Economics. But given how fast Greece is sinking into the mire, it won’t be too long before procrastinating policymakers again feel “a gloomy sense of déjà vu”.
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