Global Policy Forum

Stop the Greek Exit

The IMF, European Central Bank and European Commission have demanded significant austerity measures to curb the Greek deficit. Set to fall by a further two to three per cent this year, the decline of the Greek GDP is bringing Greece ever closer to the prospects of either default or leaving the Eurozone. Both options come hand in hand with major economic disruption, loss of investment and further austerity measures. This article investigates the possible repercussions of defaulting in both Greece and across Europe.

By Vicky Pryce

Prospect Magazine
January 26, 2011



Who would want to be a young person in Greece right now? When I left Athens for London, aged 17, I was one of many heading for the exit. This was partly out of disgust with the authoritarian regime of the colonels, who ruled between 1967 and 1974, and who made themselves particularly unpopular with the young by banning certain types of music and ordering impromptu haircuts for long-haired schoolboys. It was also because of the dire economic state that the regime had brought about. In my case, the foreign "boycott" nearly bankrupted my father's tourism business, and when I arrived in Britain I had to find paid work immediately to finance my studies.

Back then, youngsters tended to return home, not only for their mother's cooking but often to work in a bloated public sector that offered jobs for life and a pension from a ridiculously low age. No longer. Greece probably saw GDP fall by over 4 per cent last year. This year, the economy is projected to contract by a further 2-3 per cent. The danger is that young people will once again vote with their feet.

So it is no surprise that Greeks are questioning the austerity measures and whether reforms required by the IMF, European Central Bank and European Commission are worth the hardship. That Greece had to take some medicine is clear. The extent of the deficit after years of uncontrolled expansion in government and private-sector spending only came to the surface after the 2009 elections. The prime minister, George Papandreou, whose father and grandfather had both been prime ministers, is urbane, multilingual and liked and respected in the international community. But he has risked huge unpopularity at home by trying to cut the deficit from 15 per cent of GDP in 2009 to below 3 per cent by 2014, a condition for the financial support granted to Greece last May.

Greece could have defaulted then. But the repercussions would have been huge  for its economy and banks. Default would also have hit other European banks, which had lent to Greek companies or bought government bonds in the belief that the debt of countries within the eurozone was of equal risk. That illusion has been shattered. But in the absence of a default, Greece had no choice but to accept help after the markets stopped lending to it on affordable terms.

What are the options now? The fiscal position is challenging. The European Commission expects a deficit for 2010 of 9.6 per cent of GDP, declining to a still-high 7.6 per cent by 2012. Although the government is cutting spending and raising taxes to reduce the deficit, growth is likely to remain weak. Longer-term prospects will depend on the success of the reforms but the total outstanding national debt position will deteriorate for a while, from a forecast 140 per cent of GDP in 2010, the highest in Europe, to 156 per cent by 2012, according to the commission. Thereafter, even if Greece manages to achieve a surplus on its budget, the rising costs of debt repayment beyond 2013, when the current support runs out, could still lead to the overall level of debt increasing. The markets are likely to continue to demand a high-risk premium for Greek debt. JPMorgan Chase projects the debt to continue rising to 180 per cent of GDP by 2020 if Greece is forced to borrow at market rates. The implication is that another round of refinancing or substantial cuts will be needed in the 2014-15 period.

The other option would be some form of default. Would that be such a disaster? A "chaotic" default, where Greece suddenly found itself unable to meet its debt repayments, would entail major disruption to its economy, with creditors taking flight and a possible forced exit from the euro. It would also send shockwaves across Europe and affect investors' perception of Ireland and Portugal, and maybe Spain and Italy.

On the other hand, an "orderly" default, where Greece negotiates a rescheduling and reduction of its debts, would allow a managed exit and acceptance of losses by  the creditors.

Indeed, Greek officials seem to be beginning to contemplate this; the alternative would be the unpalatable option of asking Greeks to put up with more austerity-which would build up pressure to leave the euro. Greece will soon be desperate to return to the growth it enjoyed after adopting the euro in 2001. An orderly restructuring within the eurozone should, at least, buy time for reforms to make this possible. It should also give young Greeks the reason they have been looking for to stay.


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