Second Greek bailout and debt restructuring almost completed. Will it work?

All of the member countries in the euro zone have now approved the terms of the second Greek bailout.

As well, the 206 billion euro debt restructuring has also been accepted, albeit reluctantly by the majority of Greek sovereign debt holders from the private sector(a few of whom are going to court to have themselves exempted from the deal or compensated by damages) whereby they will agree to accept new lower interest rate bonds with longer terms and lower face values in effect taking a substantial haircut on the face value of the bonds they held to avoid the government more totally defaulting on them. Close to 3 billion dollars in credit default swaps will be paid out because the derivatives body that determines whether there has been a default has ruled in the affirmative.

Nouriel Roubini  has argued that these private sector bondholders will be much better off since the existing bonds they hold are worth much less than the new ones in the actual market and that it will be the public sector taking the hit that the private sector is handing them.However, that is not yet totally clear for it will depend upon the final worth of the newly restructured debt instruments and the degree to which eventually the Greek economy recovers in the long run.

The second installment of the European union and IMF bailout is also complex. It includes 130 billion euros of new money provided by the EU plus 28 billion by the IMF as well as an additional 37 billion left over from the original 110 billion first bailout. The IMF will be paying the money out over the next five years but 19.8 billion of it will be paid out by 2015.

So the exact size of the bailout according to the Financial Times and its interpretation of  the report by the European Commission Directorate General for Economic and Financial affairs is a question of which time period, three years or five years ,you are examining. Over three years the total appears to be 164.3 billion but over five years the total rises to 173.6 billion. To this amount one must add the 73 billion already disbursed under the first program.So the bill now appears to be about 246 billion euros.

This is substantial but in the context of the euro zone GDP  it is a small percentage, less than 2 %.  A large chunk of this could easily have been financed by an expansion of the broadly defined monetary base of the ECB with negligible inflationary risk.But dogmatic opposition to this approach in the heart of the ECB and the German government has prevented such an approach.

The money will begin to flow this month . Over the next three months three tranches will be released 5.9 billion in March, 3.3 billion in April and 5.3 billion in May. As part of the deal some 48.8 billion euros will be paid to the banks to help them recapitalize after taking a haircut on Greek bonds. In addition , of course, the Greek parliament has passed an additional 3-4 billion euros in budget cuts to the health care sector, the public services,as well as introduced further privatization and professional restructuring . The Greek GDP has shrunk  7.5 % this year after shrinking 5 % last year. Unemployment has risen to over 21 %,exports are down, business bankruptcies among small entrepreneurs have skyrocketed and considerable hardship has already been imposed on Greek society.the only bright spot so far is apparently the Greek shipping industry(Greece has the second largest fleet after Japan in the world) which some analysts insist is cash rich and well poised to take advantage of a recovery, when and if it arrives. But it is also quite mobile and footloose should the government seek to increase its tax burden as part of austerity measures.

Given these developments it is frankly difficult to understand why the Eurozone leadership believes that the Greek problem has been solved. A temporary lid has been placed on the problem but if the economy continues to be mired in austerity and extreme unemployment the problem will continue to fester.

As I have explained before there were and are better alternatives to these policies of austerity and retrenchment. It is a great pity that they were not tried.

(bibliographic note: I have drawn on the extensive and excellent  coverage of Greece in the financial press, particularly The Financial Times, The New York Times, the Globe and Mail,the Guardian,Bloomberg news, plus the New Statesman as well as data from the Greek Office of National statistics and the IMF and Eurostat and my own blog and knowledge base, in particular my published work on quantitative easing and deficits and debt(see the bibliography in the paper After the Crash: Rediscovering Keynes and the Origins of Quantitative Easing, posted on this blog June 3, 2011,  in researching and writing this entry.)


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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