A New "Greek Tragedy"; Greece's Social-Welfare Spending Has Finally Caught Up to It, and Its Insolvency Is Imminent. but Greece's Fortunes May Be a Small Forerunner of the Eurozone as a Whole

By Scaliger, Charles | The New American, March 29, 2010 | Go to article overview

A New "Greek Tragedy"; Greece's Social-Welfare Spending Has Finally Caught Up to It, and Its Insolvency Is Imminent. but Greece's Fortunes May Be a Small Forerunner of the Eurozone as a Whole


Scaliger, Charles, The New American


Let us be perfectly clear: The fiscal woes of Greece, one of the European Union's weaker economies to begin with, are quite likely beyond even the abilities of the denizens of Mount Olympus to solve. Greece, a thoroughgoing socialist basket case for decades, is probably going to lead the rest of the soft economic underbelly of Europe--Spain, Portugal, and eventually Italy--into insolvency, a chain of events that may dissolve Europe's decades-old experiment in economic unity.

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With the onset of the great global recession, Greece's public debt soared to 12.7 percent of the GDP, the highest in the eurozone. Fifteen percent of all tax revenues will be required to service Greece's debt this year alone.

Initially reluctant to impose austerity measures of any sort, and confident in a full bailout from the rest of the EU, Greece indignantly resisted calls to cut benefits for its massive public sector (more than 700,000 Greeks are on the government payroll, and they are compensated for 14 months of work every year). Greece's safety nets are far more lenient than those in the United States; the retirement age is only 55, for example. Add to the mix the fact that Greece's four-month-old Papandreou government was swept to power last fall amid promises not to cut benefits, and we have the makings of a full-blown meltdown, Iceland on the Aegean.

In recent days, chastened by the reluctance of the EU's heavy hitters (Germany in particular) to subsidize Greece's pampered public sector, the Papandreou government has reluctantly introduced cost-cutting and austerity measures, including tax hikes, government hiring freezes, and curtailment of public-sector benefits. "The dilemma is--are we going to let this country go bankrupt or are we going to react?" Papandreou asked Greek legislators. "We have an obligation to the Greek people to do everything we can now, today, to face immediate dangers because tomorrow will be too late." Other, economically stronger members of the EU--notably France and Germany--have been making noises for weeks about not leaving Greece in the lurch. Heartened by the perceived likelihood of a bailout lifeline and by the news that Greece will be raising taxes and cutting spending by $6.5 billion this year, world markets have reacted enthusiastically to Greece's March 4 $6.8 billion bond issue. Investors eager to snap up new Greek debt offered a total of three times the asking price. According to the Greek finance ministry, the ease with which Greece was able to peddle new government debt to finance the old "shows that despite the extremely difficult circumstances, investor confidence in the Greek economy remains strong."

Well, no. What the latest global Gadarene rush into absurdly risky investment vehicles shows is that investors have full confidence in the willingness of other governments--France, Germany, and even, perhaps, the United States--to do whatever it takes to try to prevent a total international currency meltdown and cascade of sovereign defaults.

However, it will probably be too little, too late. Greece has so far been able to raise only about 19 billion euros in revenues to defray obligations of more than 50 billion euros this year, including debt payments in excess of 20 billion euros coming due in April and May. Greek government bonds are likely to be downgraded eventually (once global markets acquiesce to the inevitability of cold, hard facts), which will prompt a mad rush to divest from Greek government debt. As the value of its outstanding debt plummets, Greece will very likely conclude it has little to lose by a partial or full default on its obligations.

"Our view for some time now has been that the government will be hard-pressed to push through this financing hump with only commercial or internal sources of funding," an analyst at Wall Street investment banking behemoth Goldman Sachs wrote of Greece.

"Some external assistance may therefore ultimately be required, likely in the form of bilateral aid or loan guarantees from individual member states. …

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