GREECE’S prime minister, George Papandreou, claims that his country has clawed back credibility with the markets after nine months of austerity. His economic team suggests Greece may be able to borrow again, despite its “junk” rating. They are cheered that the payback period for last year’s €110 billion ($150 billion) loan from the European Union and IMF is being extended, perhaps to 30 years, and the interest rate cut.
Yet ordinary Greeks are not happy. From pharmacists angry at losing their 35% profit margin on prescription drugs to train drivers facing mandatory transfers to other jobs, resistance to reform is stiffening. A daily list of strikes and protests appears on local websites. And middle-class professionals are just as cross. Doctors staged a sit-in at the health ministry this week because they had not been consulted over health-care cuts. Walk-outs by lawyers, architects and civil engineers loom as the finance ministry draws up a law to abolish their professional privileges.
More pain is certainly on its way. Unemployment, now at 13.5%, is forecast to hit 15%. The economy could shrink by 3.5% this year, after an estimated 4.2% contraction in 2010, according to KEPE, a state-run research institute. Investment is on hold; a new incentives law has been delayed, and banks are reluctant to lend so long as Greece runs the risk of default.
Mr Papandreou’s commitment to overhauling the public sector is not in doubt, yet the pace of reform remains slow. On its trip to Athens, the “troika” (the European Commission, IMF and European Central Bank) has found that Greece has missed deadlines for cost-cutting and revenue-raising because of bureaucratic foot-dragging. Louka Katseli, the labour minister, has publicly criticised the troika’s programme. Both a second round of pension reform and measures to make it easier to hire and fire are making only slow progress.
Such delays are preventing Greece from hitting its targets of raising revenues by 5% and cutting the budget deficit as a share of GDP by another 2.2 points, after a six-point reduction in 2010. Signs that Greece is slacking off may undermine any chance of arranging an orderly debt restructuring as part of the planned Franco-German “grand bargain” in the euro zone.
Greece hopes to be allowed to buy back debt held by the ECB at a 25% discount, using money borrowed from the European Financial Stability Facility. Private bondholders may be offered a 10-15 year extension of maturities and a lower interest rate. If some such restructuring went ahead, Greece’s debt burden could be trimmed by 20-30 percentage points. Yet it would still be 130% of GDP, the highest in the euro zone (see chart).
Even Greece’s supporters doubt if such a huge debt can ever be repaid in full. Annual budget surpluses would have to be intolerably high. There is talk of mass privatisations of public property (although Mr Papandreou balks at selling off any Aegean islands). Even so, nothing is likely to be big enough to make the threat of default go away.
