Greek bailout ends; debt issues persist
FRANKFURT, Germany — Greece officially completes its bailout program Monday, after eight years of cutbacks enforced in return for big loans after an economic collapse.
The exit is a welcome milestone, but it offers little assurance that the 19-country euro currency union has left behind its problems with debt. The large debt pile in Greece and an even bigger one in Italy will remain a lurking financial threat to Europe that could take a generation to defuse.
Europe’s debt problems have repeatedly raised fears over the past decade of a break-up in the euro, a worst-case scenario that would cause severe economic damage in the region and shake world financial markets and trade.
In Greece, successive
governments had borrowed heavily for three decades to fund generous spending on pensions and jobs given to political supporters, while tolerating widespread tax evasion and covering up budget shortfalls. All that blew up mightily in October 2009, when Greece admitted its budget deficit was much bigger than previously reported. Shocked investors no longer would risk lending Greece money at affordable rates, forcing the government to turn to rescue loans from the other eurozone countries and the International Monetary Fund.
The loans came with tough conditions: closing budget deficits, which led to aggressive tax increases and spending cuts; and a raft of reforms aimed at improving tax collection and the business climate in general. The economy, hit hard by spending cuts, shrank by a quarter.
All told, Greece now owes total debt of $366 billion, or over 180 percent of annual economic output. Of that, $291 billion is owed to eurozone creditors and $36 billion
to the International Monetary Fund. In 2012, about $122 billion in debt was lopped off by inflicting losses on private bondholders.
On Monday, the third and last bailout program expires, meaning no more money is available. Greece will remain subject to quarterly visits by technical experts to make sure it is meeting agreed targets for public finances until the last bailout loan is repaid, in 2060.
The other eurozone countries gave Greece enough cash to cover 22 months of financing needs and significantly eased its debt repayment terms. Greece needs to pass the quarterly reviews to activate that debt relief. But Greece will get no new reform requirements.
Some experts say that the best way to help Greece would be for eurozone countries to write off a part of the loans altogether. But governments have balked at that. The bailouts were unpopular, particularly in Germany, and loan forgiveness would be a tough sell for leaders such as German Chancellor Angela Merkel.
The International Monetary Fund and prominent economists say that if part of Greece’s loans are not written
off, its debt load will eventually start to rise out of control again. Greece is meant to run exceptionally large budget surpluses before interest payments — so-called primary surpluses of 3.5 percent of gross domestic product through 2023, and 2.2 percent thereafter. The International Monetary Fund says very few countries historically have been able to do that.
It says countries often quickly undo cuts, as people get fed up over lost services. Spending on state health care in Greece, for instance, has been squeezed to one of the lowest levels in the eurozone, with the poorest 20 percent of Greeks saying they spend 44 percent of household income on out-of-pocket medical expenses and many reporting they have simply done without medical care.
George Pagoulatos, a professor at the Athens University of Economics and Business, says that in the end the country’s creditors may have to lower their expectations for how much Greece can save.
He thinks lower surpluses plus better economic growth from the pro-business reforms could be the key to make debt sustainable.
“It doesn’t mean that tax evasion has been eradicated or that governments will no longer do favors for their supporters,” Pagoulatos said. But the degree of reform should not be underestimated. The changes over eight years “have been very significant and they must have an impact on productivity.”
Italy’s slow growth since joining the euro has meant that the eurozone’s thirdlargest member has failed to work down the huge debt burden it carried into the currency union when it joined as a founding member in 1999. It remains at an elevated 133.4 percent of gross domestic product, the second highest after Greece. Officials associated with the coalition between the populist 5 Star Movement party and the anti-immigration League have made comments about leaving the euro.
Guntram Wolff, director of the Bruegel research institute in Brussels, says Italy’s debt situation is different from Greece’s, in that most Italian bonds are in the hands of Italians. That means the governments’ debt payments stay at home to support spending and investment by Italians.