Sunday, May 2, 2010

Greece Austerity Deal Fuels Civil Unrest

It was bound to happen.   As details of a widely anticipated plan to impose severe austerity measures were agreed to in exchange for a massive bailout by the European Union (EU) and the International Monetary Fund (IMF), violent protests broke out in Greece.

The entirety of the three-year IMF-EU package is expected to be announced in Brussels after an emergency Euro-Zone finance ministers' meeting.  The aggregate amount is thought to be in the range of the previously reported figures of 120 billion Euros or $160 billion.

It remains unclear whether Sunday's meeting in Brussels will be enough to give final approval for Athens to start receiving the money or whether a summit of Euro-Zone heads of government will be required.  In addition, stiff domestic disapproval in Germany and Greece remains a major stumbling block to any deal.

Under the austerity plan, annual holiday bonuses will be limited to 1,000 Euros ($1,330) per year for civil servants and completely eliminated for those with gross monthly salaries over 3,000 Euros ($3,995).   Pensioners' bonuses will also be capped at 800 Euros and canceled for those paid more than 2,500 Euros ($3,330).  Salary cuts will not extend to the private sector.

Taxes would also be increased, including further hikes on fuel, alcohol and tobacco.  The top bracket of sales tax rises from 21% to 23%.

Finance Minister Papaconstantinou said his country's debt would reach 140 % of GDP in 2013 and start falling from 2014, while economic output is projected to contract by 4%  in 2010 and by 2.6% in 2011 before it starts recovering slowly beginning in 2012. 

MAY DAY protests in Greece turned violent yesterday as youths in gas masks and hoods set fire to vehicles, smashed shop fronts and threw Molotov cocktails and rocks at police in an explosion of fury over austerity measures they claim will hurt only the poor.

The violence came as negotiations were concluding between the socialist government of George Papandreou, the IMF and the EU over the rescue package. 

Even greater social unrest is anticipated as resentment simmers among poorer families who are being told to tighten their belts when wealthy Greeks can protect their fortunes by moving their money abroad, some of it into property bargains in London.

Resentment among Greeks as being lazy and corrupt has hardened into outrage at Germany, whose leaders complain that the Mediterranean country should never have been allowed into Europe.  Greeks were particularly angered by German suggestions that they sell their islands to pay off the debt.

German Chancellor Angela Merkel insisted on making the International Monetary Fund (IMF) part of any rescue and made German aid contingent on bolder austerity steps from Athens, delaying the rescue and underscoring deep divisions in the bloc.

The time remaining to complete the rescue is running out.  Greece has nearly $10 billion in debt due by May 19, or risks default.  While a solution is getting closer to being achieved, it is in no way a done deal.  And, even if a deal is consummated, there is no way to be certain whether it will prove to be nothing more than a temporary fix.

Marko's Take

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