Three reasons why the Greek bail-out will fail

By Matthew Partridge Feb 10, 2012

Matthew Partridge

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We’re well into February, and there’s still no deal to save Greece. The 20 March deadline, when Greece needs to pay back €14bn of government debt, is looming on the horizon.

Without the next aid package from the 'troika' (the European Commission, the European Central Bank and the International Monetary Fund), Greece will have to default.

So what’s going on? So far, the Greeks have agreed with the troika to cut public spending in return for the funds needed. Also, the Institute of International Finance (which represents private holders of Greek government debt) has agreed to take a 70% 'haircut' on its holdings.

So what’s the problem? Well, now Greek resistance to reductions in pensions means that it needs to come up with another €325m-worth of cuts by next week. It also needs to get the deal through parliament - then stick to it.

And even then the entire deal could be vetoed if eurozone finance ministers don’t believe that Athens can be trusted.

If the deal fails, then a formal Greek default - and quite possibly an exit from the eurozone - would probably follow. The bad news is that there’s clearly quite a big chance that it will indeed fail. Here are three reasons why - and what it could mean for the rest of us.

Reason 1: The Greeks don’t want the deal

The cuts to public spending have created a huge amount of public anger in Greece. You only have to check out the pictures on the front page of some Greek tabloids to see that the Greek people are not in love with Angela Merkel.

Greece’s two largest unions have declared a national strike. While this won’t directly stop the deal, it can make life very difficult for the government. For instance, strikes by tax collectors, which took place several times last year, would make it impossible to bring the deficit under control.

Also, up until now there has been unity between the major political parties. This has allowed them to support the deal - safe in the knowledge that everyone else has to take an equally unpopular stance.

However, approaching elections have seen Greek politicians increasingly distance themselves from the deal, with the aim of getting elected. Already a large number of MPs have come out against the deal, which is due to be voted on by Sunday. For example, George Karatzaferis, leader of one of the coalition parties, has stated that he "will not put up with the country being ridiculed".

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Reason 2: Bondholders can still veto the deal

Another major hurdle is getting the agreement of enough bondholders. Although the Institute of International Finance represents firms holding roughly 65% of Greek debt, 95% need to agree.

The European Stability Fund could always try to bypass this requirement by buying the bonds from the bondholders, then swapping them for the new debt with the Greek government. However, if a blocking minority refused to sell then they would be forced to increase the price.

Reason 3: The lenders could pull out

As well as either Greece or bondholders balking, Brussels or Berlin could get cold feet. The nightmare scenario is that the Greek government agrees the deal, gets the bail-out, has bondholders take the hit - then quietly reneges on spending cuts. As Jeremy Batstone-Carr of Charles Stanley puts it: “Greece has made promises before and failed to deliver. What makes this time any different?”

Even if the deal works out, the results could be just as bad for the EU. Already people in Portugal, Italy and Ireland are looking for a similar deal - and it’s not hard to see their point. After all, why should the Italians have to slog through austerity - or Ireland through 15% unemployment - if Greece can get help from both bondholders and Europe? A cynic might therefore believe that Merkel - and others - might secretly hope for the deal to collapse, to keep the other peripheral countries in line.

Europe is in for a tough time whatever happens

Events are moving so fast that it’s tricky to say what is going to happen. However, even if the deal is agreed next week there is a strong chance it could collapse. Economic prospects for the eurozone as a whole are grim - with Standard Chartered expecting fourth quarter GDP data to show that all the euro countries - including Germany - are in recession. It’s hard to make austerity stick when your people are already suffering. My colleague Tim Price has looked at ways to protect yourself against a European collapse - you can find out more by watching his video here.

• The Price Report is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600

Comments (9)

Published in European economy | More articles by Matthew Partridge

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  • 1. bmtsweden

    (11 February 2012, 04:35PM)  Complain about this comment

    The Greeks with money are busy buying property in London! Few Greeks with money keep their money in Greece! Who is going to pay? The usual suspects!!! Time to let them sink, it's going to happen anyways!

  • 2. Boris MacDonut

    (11 February 2012, 10:37PM)  Complain about this comment

    Greeks are culturally pre-disposed to not tell the truth or pay taxes. They don't trust each other, so are unlikely to trust outsiders offering solutions.
    The only country in the EC without a Land Registry and with no official body responsible for monitoring national debt, Greece is effectively a third world economy that used cheap German loans to create a pretence at being a modern democracy. It is sad, but the Greeks are simply waiting for someone else to come and run the place for them. Then they can target their ire on their new masters.

  • 3. Ellen

    (12 February 2012, 02:39PM)  Complain about this comment

    Sooner or later it looks like Greece has no choice but to default but they won't want to be the only country to do so. When they do default, it will become easier for the next country to follow them. They fear nobody will want to do business with them if they default and they will be unable to access food, medicines and other necessities. But with youth unemployment running at 50%, they must surely be risking some serious civil disobedience if they just continue giving in to German demands. As so many countries are is debt they have no chance of getting out of, I think Greece should consider a default as a real option. Other countries might well join them and the more that do, the easier it will be for Greece to recover. We'll find out it a couple of hours.

  • 4. Boris MacDonut

    (13 February 2012, 10:33PM)  Complain about this comment

    #3 Ellen. Greece will not be alone in defaulting, just first. Ireland is most likely to take Silver medal in the race for failure. Their Government has been utterly complacent in tackling a massive problem. Offering tax breaks to Google and Facebook will not fill the empty buildings constructed or pay off Debts at 1300% of GDP.

  • 5. Ellen

    (14 February 2012, 09:34AM)  Complain about this comment

    On TV I saw an ordinary greek couple who lost their jobs. They have two young children and their home is worth half the mortgage they have on it. Their future looks bleak and its a common story.

    The criminal NAMA developers in Ireland and their politican friends are all still in their big houses while soup queues in Dublin grow ever longer and another generation of young emigrate.

    On Panorama they showed people in the US living like rats in underground networks and children going to school hungry and dirty. The sick are left untreated. The numbers of people involved are enormous.

    Meanwhile Despatches showed exactly how the super rich regard the rest of us with their expose on the Olympic games, right here.

  • 6. Ellen

    (14 February 2012, 09:36AM)  Complain about this comment

    Now, I am not an young revolutionary. I am a woman in my 40s who has learned to tolerate a lot. But the economic system we live in appears to be no longer fit for purpose and if governments can no longer address their own citizens most fundamental needs, there is little point in having them there at all. Indeed, their role seems to be more about looking after the interests of the so called 1% - and I do not understand why people are not much angrier.

  • 7. Chester

    (15 February 2012, 03:29PM)  Complain about this comment

    @Ellen.6 - excellent points, which reflect the frustration and anger of many who have worked for a living, saved for the things they buy, and behaved responsibly. I, for one, want to see a wholesale re-structuring of social values, financial structures which reward wealth creation and the preservation of value and PPP

    BUT - without revolution, there is little chance we will achieve small govt at no more than 15% of GDP, the closure of central banks to stop destructive meddling, and an economy where everyone gets what they actually deserve, both good and bad (my definition of fairness)

    cont below

  • 8. Chester

    (15 February 2012, 03:30PM)  Complain about this comment

    Why are more people not much angrier? Because the majority, not just the so called 1%, are now taking more out of the system than they are putting in

    All have a vested interest in maintaining the status quo, whether they are state pensioners, the unemployed, public sector workers, defence contractors, drugs companies etc. And all have a vote through what we call democracy

    Those who should be angry are now the minority, not the 99%, which is why it will never happen without wholesale revolution, financial collapse, or a mix of both

  • 9. Ellen

    (15 February 2012, 09:46PM)  Complain about this comment

    @ Chester. Putting a ceiling on what net worth of individuals would be a good start. There does come a number where it is less about spending power and security and more about the power (or ownership) that is wielded over others.

    I don't even know what democracy is supposed to mean but I do have an idea about improving the voting system. No, not necessarily PR. In this technological age we could vote in alphabetical order. So my fellow constituents come from all over the country - I just share a first letter with them. I think it would be much harder for spin doctors to fiddle and just leave the local stuff to local government!

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