Greece gets a reprieve, but crisis not over

@CNNMoneyInvest February 21, 2012: 4:14 PM ET
Greece's Finance Minister Evangelos Venizelos at a press conference following a meeting of euro area finance ministers on the nation's 130 billion euro bailout.

Greece's Finance Minister Evangelos Venizelos at a press conference following a meeting of euro area finance ministers on the nation's 130 billion euro bailout.

NEW YORK (CNNMoney) -- Once again, Greece appears to have been snatched back from the brink of default with the promise of more bailout money.

The €130 billion rescue package, which was backed by European finance ministers early Tuesday, should enable Greece to make a €14.5 billion bond payment next month, assuming a crucial agreement with private sector investors is approved.

But many experts say the second bailout will not resolve Greece's long-term debt problems and the nation will eventually need more support. They argue that focusing on austerity and debt reduction does more harm than good by further stunting the already shrinking Greek economy.

"The European authorities seem more intent on punishing Greece than helping the economy recover," said Mark Weisbrot, economist and co-director of the Center for Economic and Policy Research. "For two years now they have been pushing the Greek economy into recession, and there's still no light at the end of the tunnel."

To qualify for the bailout, the Greek government passed a deeply unpopular package of austerity reforms and agreed to increased oversight by officials from the European Union, International Monetary Fund and European Central Bank, known as the troika.

In what some see as a compromise of national sovereignty, Greece will be required to amend its constitution by introducing a provision that gives priority to "debt servicing payments" ahead of other national obligations.

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Greece also agreed to set aside enough money to pay off three months worth of debt in a "segregated" account that will be overseen by the troika.

The stringent terms demanded by the EU, IMF and ECB stem from the lack of progress made on the structural reforms that are a condition of Greece's first bailout. As a result, some of the eurozone's strongest members, including Germany, have been reluctant to provide more bailout money without additional assurances.

"It is undeniable that the country needs to go though structural reforms to achieve sustainable growth rates in the long term," said IHS Global Insight economist Diego Iscaro. "However, structural reforms will take time to bear fruit and it is increasingly clear that, without a growth strategy in the short term, the economy will remain in the doldrums for a significant period."

The Greek economy, which has been in recession for years, shrank 6.8% in 2011. Looking ahead, economist expect the recession to deepen as austerity measures take their toll.

Reforms have already sparked violent protests in Athens, and will likely dominate the political debate in Greece as the nation prepares to elect a new government later this year.

The challenges facing Greece were spelled out in a "debt sustainability analysis" prepared by troika officials. It shows that, under a worst case scenario, Greece's debt load could remain at 160% of gross domestic product by 2020.

That's in stark contrast to the target set out in the bailout program, which seeks to reduce Greece's debts to 120.5% of GDP.

Under the "tailored downside scenario," Greece would fail to make the reforms necessary to revive its economy, resulting in higher unemployment and a deeper recession, according to the analysis. The scenario also assumes that Greece would backtrack on its austerity program and further postpone the sale of state assets.

This would prevent Greece from returning to the private credit market and make the nation more dependent on bailout funds.

"Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," the analysis states.

Meanwhile, the overall program is contingent on banks and investors agreeing to a historic restructuring of Greece's private sector debts.

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The writedown, which would result in losses of 75% for the private sector, would erase €107 billion of Greek debt, according to the Institute of International Finance.

In addition, eurozone governments agreed to lower the interest rates on Greece's existing bailout loans. And some eurozone central banks have agreed to transfer future profits on their Greek bonds to Athens.

While these measures should help address the nation's immediate debt problems, Greece will ultimately need more support, said Carl Weinberg, chief economist at High Frequency Economics.

"We have a new band-aid on an old wound," said Weinberg. "But we are sure the saga is not yet over."  To top of page

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