Will Greece default?

Submitted by Matthew on 18 May, 2011 - 10:09

At the start of May, Portugal followed Greece and Ireland into a European Union/ IMF financial “bailout”. At about the same time, the clamour of economists predicting that Greece’s bailout cannot possibly work became deafening.

“This effort has failed: the cost of borrowing [for Greece, etc.] has risen, not fallen... The chances of renewed access [for Greece] to private lending on terms that the country can afford are negligible” (Martin Wolf).

“Here’s a hint for Europe’s politicians: if the math says one thing and the law says something different, it will be the law that ends up changing” (Charles Calomiris).

“The program for Greece is... not even close to working” (Paul Krugman).

“We are more or less guaranteed to find ourselves facing some kind of Greek default” (Edward Hugh).

Greece is being “bailed out” in the sense that European funds and the IMF are lending the Greek government money to save it from having to borrow on the open market to pay its old debts as they fall due. It can’t borrow on the open market except at prohibitively high interest rates.

But the cuts demanded by the European Union and European Central Bank and the IMF as conditions for the loans have sent Greece’s economy into a spiral. It is even further than it was before the bailout from being able to get enough export earnings to make it look creditworthy to the international financiers.

Despite the big social cuts made by the German government — for political reasons, to enforce a “hard” neoliberal way forward from the 2008 crash, since Germany itself has no government debt crisis — German capitalism has done relatively well in the last year. Its output grew 5.2% between the first quarter of 2010 and the first quarter of 2011.

That does not help Greece. When the current bailout funds run out, some time in 2012, Greece will face limited options.

It can seek a further bailout. Quite probably the resentments of German taxpayers will make that impossible. In any case, it would mean that (as Martin Wolf puts it) “Greece would lose almost all sovereignty indefinitely”. Its government would become, for a long future, little more than an agency for carrying through policies imposed by the IMF and the European Central Bank.

It can seek a “restructuring” of its debts, that is, a polite and controlled agreement that it won’t pay them, or will pay them late. But the bailout was motivated, in the first place, by the desire to make sure that German, French, British and other banks got back the money they’d lent in Greece.

A negotiated “restructuring” within the euro will be difficult, and may give only temporary relief anyway.

The other option is for Greece to quit the euro. The restored separate Greek currency (drachma) will inevitably plummet in value, compared to the euro, making Greece’s external debts harder to pay, so the exit will have to go together with a debt restructuring.

The boon of this move is that Greek industries with costs in drachmas — which would then equate to fewer euros, pounds, or dollars — then become more competitive internationally. The boon would be paid for by imports consumed by Greek workers becoming much more expensive for them, as measured in drachmas.

Euro-exit would give the Greek government more room for manoeuvre, but room it would use to impose yet another squeeze on the Greek working class. An exit from the euro is no easy road, and not something that would automatically or even probably push the Greek government to the left in any sense; on the other hand, the current course means that the people of Greece pay both the cost of (doomed) efforts to avoid euro-exit and default, and the cost of the euro-exit and default when they come. “Postponing the day of reckoning... will merely make the debt restructuring more painful when it comes” (Martin Wolf).

The clock is ticking. For now, the dominant EU powers, and the Greek government, are effectively just hoping that “something will turn up” to brighten the prospect.

Portugal’s prime minister José Sócrates claimed that Portugal’s bailout would involve no cut in public sector wages or sackings of public sector workers. He is contesting a general election on 5 June. In fact he didn’t really need to paint up the deal. As in Ireland, the big opposition parties have accepted it anyway.

The detail shows that Portugal is committed to a freeze (i.e. real-terms cut) in public sector pay and pensions, a curtailing of the level of unemployment benefits and the time they are paid for, job cuts across local authorities, a tax on pensions, and a privatisation drive.

Whether Portugal’s bailout is any more workable than Greece’s remains to be seen. A Greek default is bound to make international financiers more reluctant to lend to other debt-ridden eurozone countries, and could tip Portugal and Ireland — and even Spain — into intractable dilemmas even if they might have escaped them otherwise.

And then? Some economists think the whole euro system will break up. For sure the present tentative global capitalist economic recovery will be put under stress, and may plunge into new slump.

Even on the most optimistic scenario, this “recovery” has the general pattern of capitalist economic recoveries writ large: it operates on the basis of increasing inequality.

In Europe, the poorest people in the poorest countries pay the biggest price, while the richest capitalists, in the City of London and the heights of German industry, get the most help in the hardest times and zoom ahead once there is a flicker of improvement.

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