Greece Gets Reprieve But Default Still A Possibility

After more than half a year of back-and-forth negotiations, with both sides guilty of brinksmanship bargaining, we learned Monday that a deal had finally been reached to provide Greece with a second emergency bailout. A total of 130 billion euros, or $172 billion, has been promised to Greece with the first payment expected in time to meet the next bond repayment scheduled for March 20th.

While the accord may avoid an immediate default, there are significant strings attached to the continuation of future payouts later in the year. These are similar to the conditions set out for the initial rescue package negotiated two years ago and include both spending cuts and revenue targets. Greece’s commitment to meeting these conditions for the first package were less than impressive, leading ultimately to the ouster of former Prime Minister George Papandreou.

In this case, Papandreou successfully negotiated the terms of the first rescue package with European officials. However, Papandreou then insisted – after the deal had been worked out, mind you – that he needed to hold a public referendum before he could implement the very things to which he had already agreed to do earlier.

Cynicism aside, the conditions being imposed on Greece are rather dramatic and will assuredly lead to an intensification of the protests that have marred Greece’s major cities in recent months. Greece is expected to reduce last year’s deficit, measured at 160 percent of total GDP, to a target of 120 percent of GDP. This will require Greece to accelerate an already aggressive list of spending cuts, while simultaneously raising taxes.

Complicating matters is the fact that Greece is entering its fifth straight year of recession. As a result, revenues have declined which will force the government to raise taxes and other fees even more than originally planned. This is why many economists feel the 120 percent of GDP goal is simply not possible and fear that the riots and protests in Greece to date are merely a warm-up for what is to come.

Guillaume Menuet of Citigroup in London said he expects that as early as June, Greece will miss its deficit targets and, in his words, it would be advisable to assume Greece would face a “fully fledged, coordinated default” by the end of the year.

Joerg Kraemer, Chief Economist at Commerzbank in Frankfurt, said that it was unlikely Greece would meet the conditions of the bailout and “for the second half of the year, there is a significant probability that a frustrated EU stops payments to Greece.”

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