Greece must choose the road of change or the road of catastrophe: that was how Greek prime minister George Papandreou described the two options facing the Greek people before Wednesday’s austerity vote in the Athens parliament. Parliament’s approval, by 155 votes to 138 with five abstentions, marked a first step. More must follow as implementing measures are presented to parliament on Thursday. Then must follow the unleashing of the concrete measures themselves.
The two scenarios of change or catastrophe confront not only Greece, but Europe as a whole. The difference is that Europe does not have the power to choose. In the end it is the Greeks who must take the decision, acting both for themselves and for everybody else. Whoever would have thought when Greece joined the eurozone that the whole fate of the currency area – and indeed the stability of the world economy – would rest on its shoulders?
For many Greeks every option looks like catastrophe, faced as they are with wage cuts, tax increases, job losses, slashed public spending and privatisation. Public debt is equivalent to €31,000 per person, while unemployment of 15-24 year-olds is running at 43 per cent.
It took some courage for government MPs to vote for the Papandreou package in the face of public anger, but some cynicism for the opposition to oppose it, given the evidence that an immediate Greek default could trigger the bankruptcy of the Greek state and create a wave of contagion across the European banking sector and beyond, similar to that which followed the collapse of Lehman Brothers.
European leaders have used every form of pressure and persuasion to convince Greece of the need for further drastic action. Of course the EU and IMF have the whip hand, since they provide the funds to forestall a default, but they also know that a Greek default would have profound consequences for them, not just within the eurozone and Europe, but for the world economy as a whole. It’s a variation of the old Paul Getty saying, that if you owe the bank $100 that’s your problem. If you owe the bank $100 million, it’s the bank’s problem. Greece owes a lot of money.
The overriding aim now will surely be to avert default in the near term. Assuming that everything goes according to plan this week, it looks as if €10 billion will be made available to meet Greece’s immediate needs, with a further €100 billion to follow as the austerity programme is rolled out.
There’s then the private sector. About €60 billion of Greek debt is held by private institutions, most of them French and German banks, so President Sarkozy’s cunning plan to roll over Greek debt without it being defined as a default may let everybody off the hook. Under this proposal it seems that private bondholders would voluntarily agree to exchange the bonds which they currently hold for much longer-dated stock, so obviating the need for the Greek government to redeem early maturing bonds.
The voluntary nature of the scheme would mean that in the eyes of the European Central Bank it would not be deemed a default.
And that is surely the immediate objective: to avoid a Greek default which would threaten to break the euro and cause turmoil in global markets. It may prove to be no more than a holding operation to keep “time’s winged chariot” from catching up, but should at least buy time for the banking sector to build up greater resilience. What seems much less likely is that Greece and the other peripheral euro countries will be able to use the breathing space to strengthen their economies and effectively deal with their debts.
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November 4, 2022