Members of Greece's public power corporation workers union (GENOP) march during a protest in Athens February 9, 2012.
Greece's high-speed plunge toward bankruptcy and probable exodus from the euro zone was halted by the government's last-minute agreement to commit to intense austerity measures in exchange for a second bailout in two years.
The agreement came after a seven-hour game of brinkmanship between the Greek government and its would-be rescuers – the European Commission, the International Monetary Fund and the European Central Bank – ended at dawn Thursday.
The tentative agreement will see the private-sector minimum wage cut by 22 per cent and the elimination of as many as 150,000 government jobs by 2015. That triggered immediate protests in central Athens and vows from union leaders for a 24-hour national strike beginning Friday.
While the unelected Greek parliament is expected to approve the austerity measures on the weekend, some politicians said the promised employment and spending cuts had gone too far and risked deepening the recession and triggering social chaos. Others thought that public backlash would make the austerity measures impossible to implement, especially since a spring election is probable.
Shortly after the austerity deal was announced Thursday afternoon in Athens, Greek deputy labour minister Yannis Koutsoukos resigned in protest. He said that the sponsors of the new bailout are imposing measures which will "demolish the structure of labour relations."
In exchange for the austerity measures, Athens is to receive a bailout worth €130-billion, though the final figure could be slightly higher because of the widening government funding shortfall as the Greek economy shrivels. German Finance Minister Wolfgang Schaeuble, who on Thursday night questioned whether the austerity agreement went far enough, said he would not sanction an amount greater than €130-billion.
Greece is about to enter its fifth year of recession. The economy contracted by about 6 per cent last year and its output is expected to fall by no less than 3 per cent this year, though many forecasts put the figure much higher. On Thursday, Greece announced that year-on-year industrial output fell 11.3 per cent in December while unemployment in November reached a record high of 20.9 per cent.
If Athens had failed to secure the bailout, a debt default would have been inevitable. The insolvency date would have come on March 20, when the government has to redeem €14.5-billion of sovereign bonds.
The austerity deal is only part of the attempted Greek rescue package, which began in the spring of 2010 with a €110-billion bailout. On Thursday night, finance ministers from the 17 countries that share the euro were in Brussels trying to hammer out a Greek sovereign bond "haircut" that would see private bond investors – mostly banks – take losses of about 70 per cent on their holdings. If successful, the debt-crunching exercise would reduce Greece's debt by about €100-billion.
Acceptance of the austerity package was the minimum condition for the haircut. The negotiations are bound to be difficult, partly because ECB president Mario Draghi made it clear Thursday that the bank had no intention of taking losses on is €40-billion portfolio of distressed Greek debt. The IMF had been putting pressure on the ECB to take losses to help bring down Greece's crushing debt load.
There was no shortage of skepticism about the ability of austerity measures, the bailout and the debt haircut to reverse Greece's economic slide. The debt haircut is forecast to reduce Greece's debt to 120 per cent of gross domestic product by 2020, from the current 160 per cent. The euro zone debt-to-GDP average is 80 per cent.
Most economists and strategists, even some European political leaders, consider a 120 per cent debt ratio unsustainable, given the Greek economic freefall, made worse by the austerity measures.
"The current thrust of fiscal policy will almost certainly guarantee a default, eventually," said Marshall Auerback, strategist for Toronto's Pinetree Capital. "If you don't have a mechanism to allow growth, then how do the Greeks service their debt, even with a reduced debt burden? The collapse of revenues isn't coming from widespread tax evasion. It's a symptom of broad economic collapse."
In the draft austerity agreement seen by The Globe and Mail, the Greek government, led by Prime Minister Lucas Papademos, has agreed to the deepest spending and employment reductions of any euro zone country since the currency was launched a dozen years ago. It calls for 15,000 "mandatory separations" this year among government workers and 150,000 government job losses by 2015. Pension reform would see savings of €600-million in 2012, though Athens' vow to protect low-income pensioners came close to killing the agreement before Thursday's breakthrough.
Other measures include military cutbacks and the privatizations of airports, motorways and energy and real estate companies. There were serious doubts whether the government would have the political will to ram through the austerity program; previous austerity efforts have come up short. "It will be very difficult to implement," Constantine Michalos, president of the Athens Chamber of Commerce, told the BBC Thursday. "We're nearing a social explosion."
Some European politicians are not convinced the rescue effort will succeed, given Greece's dire economic state. In an interview with a Dutch newspaper earlier this week, European Commissioner Neelie Kroes said the euro zone could survive Greece's exit from the euro zone. "When one member leaves, it doesn't mean 'man overboard,'" she said.
Eric Reguly