Greek bailout talks have deadlocked again, but at the moment the culprit is not the hedge funds seeking a higher payout on the distressed debt they bought, but the “troika” of the EU, ECB and the IMF. They gave Greece a Monday deadline to accept bailout terms. And those terms, frankly, are totally insane.
The deal calls for Greece to run a primary budget surplus (not counting interest payments on debt) in 2013 of over 2% of GDP, rising to over 4% by 2014. That implies massive cuts to public spending in the middle of a 5-year recession, if not a depression. As Antonis Samaras, leader of the New Democracy Party, told the Financial Times, “They’re asking for more recession than the country can take.” Samaras also has highlighted that the troika seeks cuts in private sector wages as part of the deal, of up to 25%. There would also be a 35% cut in supplementary pensions.
If Greece fails to agree to this today, the troika will likely suspend debt payments, forcing the country into default. European leaders said explicitly that they would not fund a continuing bailout unless Greece agreed to the troika’s demands.
While talks resume today, it’s worth pausing to note just how crazy this all is. Greece has been suffering under an austerity regime for the last two years. This has caused a depression level of suffering in the country. And significantly, it has not in any way reduced the country’s debt burden. In fact, it has expanded it.
Greece’s debt rose to 159.1 percent of its gross domestic product in the third quarter of 2011 from 138.8 percent a year earlier, according to data released Monday that illustrates the country’s worsening economic straits after two years of austerity budgets.
The data, reported by the European Union statistics agency Eurostat in Luxembourg as part of a new series, underscored the urgency of the talks continuing Monday in Athens, where Greek officials and international lenders were trying to reach agreements that would make possible the release of new financing to stave off a Greek default next month […]
Two years of austerity measures have weighed on employment, with the jobless rate at 19 percent, and hurt government tax revenues. The economy is expected to show a contraction of 6 percent in 2011, the International Monetary Fund has estimated.
Shrinking the G.D.P. side of the equation makes it harder to bring down Greece’s debt ratio to a more manageable level, and adds pressure for additional taxes and spending cuts.
That last sentence shows the upside-down logic here. Austerity has led to a 6% drop in GDP. That GDP drop raises the debt to GDP ratio. And so we need…. more austerity?
There’s no economic underpinning for this. Greece is being pounded into dust. I suspect what Matt Yglesias says is at least partially right: this has nothing to do with economics but German politics. Bailing out Greece is unpopular, so there has to be this moral flavor to it, where Greece gets punished for their sins. This only leads to higher deficits and more bailouts, but the beatings will continue until morale improves, I guess.
Apparently the Greek Finance Minister is too busy campaigning for the leadership of his party to engage with the talks, so the Greek leadership isn’t entirely blameless. But given the context of “Greek leadership” when the troika is asking them to sacrifice their own people, perhaps the best thing to do is to stay away