GREECE, FOR the second time in over a year, seems likely to receive a bailout that, at least for now, should save it from defaulting and save others – such as Ireland and Portugal – from the adverse consequences of such a financial catastrophe.
The broad outline agreement reached yesterday between the Greek government, and the “troika” (European Commission, International Monetary Fund and European Central Bank) on a medium-term budget plan means that Greece should get more money and an extra year to address its fiscal problems. But that assumes Greek premier, George Papandreou, next week wins parliamentary backing for a new round of cutbacks and economic reforms at a difficult time for his government. His leadership and authority is threatened by rebellious backbenchers in his Pasok party, amid increased signs of political and social tensions in the country.
Yesterday, Mr Papandreou completed a review with the troika of Greece’s proposals for state asset sales, lower spending, higher taxes, and public sector job cuts in return for a second financial rescue package. Time is fast running out for the government. It was clear that Greece could not return to the bond markets in 2012, as envisaged in the first EU-IMF bailout agreement, and so faced a funding gap next year. The IMF has, under the current agreement, threatened to withhold its share of a loan payment due later this month – unless the EU first produces a plan for new loans for Greece for 2012 that will close that gap. A second bailout for Greece will need approval from euro zone finance ministers and EU leaders later this month.
Greece’s efforts under the present bailout have met with limited success. Structural reforms have been blocked by ministers, while budget targets have been missed – partly because of a work-to-rule by tax collectors opposed to IMF plans for reforming the country’s highly inefficient tax system. Progress on state asset sales has been slow. And last week Moody’s ratings agency raised the probability of a Greek default to 50 per cent while downgrading its credit to junk status, on a par with Cuba. The contrast with Ireland, a beneficiary of a similar EU-IMF bailout on more onerous terms – a higher interest rate on loans – is stark and instructive.
Ireland has, so far, met the targets set out in its agreement. Unlike Greece, there is cross-party support for the austerity measures set out under the adjustment programme. There have been few street protests, no general strikes, and no violence, while social cohesion has been maintained. The Government is clearly hopeful, though not yet certain, that Ireland can avoid a second bailout.
Minister for Finance Michael Noonan is rightly optimistic the State could return to the bond market in a limited way next year. Earlier this week Frank Gill, a senior director with credit rating agency Standard & Poor’s, endorsed that view. More encouragingly, he also said that Ireland should be able to withstand a possible debt default by Greece, as the market had “the capacity to differentiate” between the two countries.