Greece: Call for EU assurances to avert debt default - full text
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George Papaconstantinou, the Greek finance minister, on Feb. 18 called on EU foreign ministers to give clear assurances on how they would support the Greek economy, which faced bankruptcy if funds to meet several foreign loans could not be raised by April. The Greek economy had been in crisis since the government revealed in October 2009 that budget deficit figures published by its predecessor had been seriously underestimated, with the country facing a budget shortfall of around €21bn (US$1.00=0.7401 euros as at Feb. 19, 2010) by early 2010. As Greece was a member of the European single currency (the euro) the prospect of Greek default sent shockwaves through the eurozone.
Immediate Context
Papaconstantinou's comments came in response to a meeting of EU foreign ministers on Feb. 15 -16, which had resulted in a pledge that the EU would use fiscal instruments to prevent a Greek crisis from harming the euro. These pledges were reported in the global press more as a political undertaking than as a specific bailout commitment, and were accompanied by an EU warning that Greece must bring its GDP deficit to 8.7 per cent by the year's end. A deadline of March 16 was set for Greece to demonstrate progress toward this goal, with ministers insisting that if existing austerity measures proved inadequate they would seek further Greek spending cuts to meet the target.
Papaconstantinou indicated that he would meet European Commission (EC) representatives to discuss the further austerity measures, but warned that for his deficit reduction plan to succeed he required a clear signal of support from the EU to stabilise the bond markets. He spoke against a backdrop of domestic unrest following the announcement by Prime Minister George Papandreou on Feb. 2 of an initial raft of public spending cuts. These included an increase in the age of pension eligibility and a civil service pay freeze extending even to low-paid public sector employees.
Reaction and Outlook
As a euro member with no direct control over interest rates and very limited control of inflation, the Greek government could turn only to spending cuts to increase liquidity. The cuts Papandreou had announced in his Feb. 2 televised address were intended to cut Greece's deficit from 12.7 to 8.7 per cent of GDP in 2010, and to below the euro zone ceiling of 3 per cent, as required by the EU's Stability and Growth Pact (SGP) by 2012. The announced cuts provoked domestic protest, with a civil service strike greeting Papandreou's initial announcement, a customs strike commencing on Feb. 16, and a 24-hour walkout by taxi drivers beginning on Feb. 19.
None of the measures substantially slowed the growing spread on Greek bond values through February, and markets remained concerned that a Greek collapse would hurt the broader eurozone. In light of the EU foreign ministers' unwillingness to firmly commit to helping Greece, Papaconstantinou indicated that he considered a bailout from the IMF, rather than from EU budgets, as another possible solution to the crisis. Recourse for a euro member to the IMF was technically precluded under the Maastricht Treaty, but the option was seen in some respects as preferable to an EU bailout. The prospect of using EU money to rescue Greece was deeply unpopular among voters in many other eurozone countries, including Germany where premier Angela Merkel expressed strong opposition to the principle of Germany's thrifty taxpayers bankrolling the lower pension age of the Greek welfare system. The Economist of Feb. 12 also noted that financial management terms set by the IMF might be politically preferable to those enforced by another sovereign state.
Historical Context
Greece was occupied by Nazi German forces in 1941 after fighting off an invasion by fascist Italy . Allied forces under British leadership liberated the country in 1944 and the government in exile returned. A civil war between the liberal democratic government and communist insurgents ensued and continued until 1949 when a decisive military victory for government forces reunited Greece. In 1951 Greece joined NATO and the Constitution of 1952 enshrined parliamentary democracy and universal suffrage .
The democratic government was overthrown in 1967 by a CIA-backed right-wing military coup, launched on the pretext of preventing a communist government being returned in the impending general election. The military government continued in various guises until the restoration of democracy in 1974.
Greece joined the EU in 1981 and the European single currency in 2001. Euro membership had initially buoyed the Greek economy, which grew on average 4 per cent per annum from 2001 to 2008. But against a backdrop of heavy government spending, Greek inflation grew above the eurozone average, and the country relied heavily on foreign loans, available at favourable rates thanks to Greece's euro membership.
When global recession hit in 2008 Greece appeared to be relatively shielded, with the then-government projecting a budget deficit of 5 per cent of GDP—modest compared with the average for other eurozone countries. However, following the October 2009 election of Papandreou's Socialist government, another picture emerged. The budget shortfall, the new administration advised, was closer to 12.7 per cent of GDP, equating to roughly €21bn. The EC estimated Greece's national debt in 2009 at 112.6 per cent of its GDP, compared to the eurozone average of 78.2 per cent.
Scrutiny was applied to the currency swaps which the EU said had been used to conceal Greece's growing debt, and to a complex arrangement for off-balance-sheet debt brokered by the investment bank Goldman Sachs. The EU set Greece a deadline of Feb. 19 to account for the inaccuracy of the earlier figures; hours before the deadline, the country replaced Spyros Papanicolaou, the head of its national debt agency, giving no immediate explanation for the change.
The Greek government initially sought to recover liquidity with bond sales, successfully raising €8 billion from a sale on Jan. 25 of five-year bonds at a 6.2 per cent interest rate. The sales temporarily calmed financial markets, but shortly afterwards the yield on Greek ten-year bonds again began to rise: in early 2010 yields stood at over 4 percentage points above the rate on German bonds, regarded as the eurozone's safest assets.
