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February 12, 2012
Poor Greece. The imposed harsh austerity--- wage and pension cuts, tax rises and cost-cutting reforms--- is pushing Greece towards economic and rebellion and a trajectory to collapse. Greece is smouldering.
Without the new bailout, Greece will be unable to redeem more than €14bn of debt on 20 March, leaving the country in sovereign default and ushering in an even bigger crisis in the eurozone's distressed periphery. Default on its debt next month may well mean that Greece would be forced out of the euro.
The price of the "troika" of European Commission, ECB, and IMF officials €130bn rescue package includes €300m in pension cuts, an additional cut of 150,000 government jobs by 2015 and a 22% reduction in the minimum wage from about €750 a month. The bailout now on the table also involves a partial default to private sector creditors such as banks. The bond market investors take a haircut.
Martin Rowson, Greek crisis
The aim of the second Greek bailout in two years is to cut the country's debt from 160% of gross domestic product now to 120% by 2020. That still amounts to insolvency. A debt level of 60-80 per cent of GDP by 2020 – is probably the most that a weak economy like Greece could cope with. Greece's hands are tied, since it cannot devalue its currency because it uses the euro.
As there is no mechanism to allow growth, how can the Greeks service their debt, even with the reduced debt burden? The deficit reduction won’t come when you deflate a rapidly declining economy into the ground. Nor is it simply a loss of wealth and income or lesser income/social mobility. It also means a health care crisis: severe cutbacks in hospital staffing, which in turn means greater infections in hospitals and more people dying in hospitals. Third world status is the result of the endless cycle of austerity and bailouts designed to salvage the debt-ladened country.
Greece will not be able to squeeze more revenue out of an economy that is in its fourth year of recession. The problem for Greece with respect to economic growth is that the country doesn’t make a lot of products to export It makes feta cheese and olive oil, and it has tourism. So it needs to devalue--become much cheaper than than Spain, Italy and Portugal. It can do this if it leaves the euro and go back to its local currency.
The problem is that whilst Greece is teetering on the edge of economic collapse it is also on the brink of becoming ungovernable and its institutions barely functioning. The central government is not capable of designing and implementing the growth-boosting reforms that Greece desperately needs. Its public administration is dysfunctional.
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The situation in Greece is bad.
Without the bailout – the second in two years – bankrupt Greece will be insolvent and have to default on its debt next month when it needs to redeem €14.5bn of loans.
They cannot pay off their debt. So they borrow to repay their loans.