Friday, April 30, 2010

The Greek Tweak: Will It Work?

This morning, the newswires were buzzing with reports of an austerity plan for Greece and an expanded loan facility from the International Monetary Fund (IMF).  Athens has agreed to the outline of a €24 billion austerity package, including a three-year wage freeze for public sector workers, in return for a multibillion-Euro loan from the Euro-Zone and the IMF. 

The austerity package also includes an increase in  Greece's Value-Added Tax (VAT), the second this year.  Public sector workers will lose their “13th and 14th month” salaries, paid days at Christmas and Easter and see further cuts in allowances.  In other words, Greece's government employees will be required to work 14 months for 12 months of pay.

Greece’s abnormally large public sector, which employs about 13% of the workforce, will be gradually reduced through a recruitment freeze, the abolition of short-term contracts and closures of hundreds of outdated state entities.  Pension benefits were to be frozen and/or deferred.

Final details of the measures, which were intended to slash the budget deficit by 10-11%  of Gross Domestic Product (GDP) over the next three years, are still being worked out.  Currently, Greece's budget gap is running at nearly 14% of GDP and is the central cause of the country's threatened insolvency.

Negotiations with officials from the IMF, the European Commission and the European Central Bank are due to be completed at the weekend and the measures will be presented for approval by the Greek parliament next week.

The IMF is looking at raising its share of Greece’s financial rescue package by another €10 billion ($13.2 billion) amid fears that the planned €45 billion bail-out will prove insufficient to curtail the country's sovereign debt crisis.  The entire amount deemed necessary to save Greece is now €100-120 billion.

Politicians and economists across Europe have been highly critical of the slowness with which Euro-Zone governments have addressed the Greek crisis, which burst into the open more than six months ago with the disclosure that Greece’s 2009 budget deficit was far higher than previously believed.

The slowness partly reflects the unwillingness of Angela Merkel, Germany’s Chancellor, to commit Berlin to a multibillion-Euro rescue of Greece when German public opinion is against it and there is a risk of a legal challenge to the aid in Germany’s constitutional court.

Will the "Greek Tweak" work?  Probably not.  The magnitude of the austerity savings are fairly small by comparison to the bail-out needed.  In addition, the Greek economy is already spiralling downward and further austerity measures will only deprive the economy of stimulus.  In addition, Greek government employee unions will not be an easy sell, regardless of the magnitude of the problem.  Finally, until Germany signs on, no deal can possibly be consummated. 

The projected cost of the bail-out has nearly tripled in the last two months.  Greece has been shut out of the capital markets.  There is no reason to believe that all the bad news is on the table.  The only real solution is a major restructuring of Greece's debt and a major economic change from the socialist policies which have created the inefficiencies that exist today.

Marko's Take

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