Germany has shifted and default is now inevitable…
Its agreement with Greece to restructure its economy so that it could grow and repay its debts – thus preserving the euro – has frayed to breaking point
Andreas Whittam Smith
Thursday, 15 September 2011
A Greek debt default is close. It could come next week, or very soon anyway. Think of Greece as being in intensive care. You enter the eurozone hospital and go up to the ward where Greece is stretched out in agony. You peer through tubes and pumps at the screens recording the patient’s progress. What do you find?
That it could hardly be worse. The returns that investors demand for owning Greek debt have risen to such astronomical levels that the line goes off the scale. Bonds that are due to be repaid next March are priced at half their official value. This is like looking at a thermometer where the mercury has shot up to the top. But more important are the dials that record the performance of the Greek economy. It is shrinking at 7 per cent per annum, making it ever less likely that the country can meet the promises it made to secure bailout funds. Greece is rapidly getting weaker, not stronger and government revenues, the wherewithal for repaying its debts, are shrinking.
The doctors would also say that Greece has never been in good shape. The country entered the euro system on the basis of foolishly optimistic figures supplied by the government at the time. It used the early days of its membership to borrow vast sums at low rates that it could only hope to repay if it achieved fast economic growth, which it didn’t. The country still lacks the basic attributes of full statehood. It cannot collect more than a small proportion of the taxes that it levies and it cannot keep its frontiers secure – many illegal immigrants in Europe have arrived via Greece.
These are the circumstances in which next Monday officials representing Greece’s creditors are due to come to Athens. They left rather hurriedly a few weeks ago in despair at what they found. Now they are returning to make a final attempt to see whether they can release a further €8bn of the rescue funds that the government needs if it is to pay state salaries and pensions in October. But Wolfgang Schauble, the German finance minister, remarked the other day that the €8bn would not be released unless the Greeks “actually do” what they promised by enacting reforms to modernise their economy.
Taking this warning to heart, Evangelos Venizelos, the Greek finance minister, told Parliament: “Public sector reform is going to happen right now” and the government announced that 10,000 jobs at state-controlled entities would be cut immediately and another 10,000 within weeks. At the same time, a new €2bn two-year property tax was announced. It would be based on surface area and the levy would be collected through electricity bills. Unfortunately Greece’s power workers immediately said they would sabotage these plans.