Greece's woes

The package of measures adopted by Eurozone leaders to rescue Greece from its debt crisis and the region from more financial problems has convulsed the Greek government which announced a referendum on it, only to abandon it later. The package was considered a step forward but it was too early to say whether even that would put an end to the present troubles. Greece was not the only problem, with Italy and Spain also facing the threat of default in the coming weeks or months. The consensus on the package was a desperate measure because the prospect of no agreement would have been much more painful.

The final agreement has three main features. Private investors, mainly banks, which hold Greek debt, would  ‘voluntarily’ agree to a 50 per cent write-down of their returns. While this may help Greece to reduce its debt burden from 180 per cent of its GDP to 120 per cent in the next few years, there was no clarity how the country would service even this reduced debt. The harsh austerity measures, which are themselves opposed within the country, make it difficult for the country to raise money to meet its liabilities. If the salvage plan is rejected, Greece will have no option but to default and go bust.

There is also the possibility of the government collapsing even before that and the political uncertainty has made matters worse. The second element in the plan was the raising of new capital by banks by June 2012 to recapitalise themselves so that they have the ability to withstands more shocks expected from other countries. But there are costs involved in recapitalisation and somebody will have to bear them.  It is not yet clear who will. The corpus of the bailout fund, the European Financial Stability Facility, will be increased, from 440 billion Euros to 1 trillion Euros. But there are doubts about where the enhanced bailout funds will come from.

The plan would have at best only stopped the present slide, even if it was implemented. In the face of prospects of rejection or other road blocks, the initial welcome by the global financial markets has given way to despair.  Two earlier packages had failed and situation had deteriorated. It may be almost impossible to formulate another plan, and Greece’s threat to pull out of Eurozone is fraught with uncertainties.