Greece faced its latest crisis last Wednesday when it missed another deadline for spending cuts before qualifying for a second, 130 billion euro ($172 billion) bailout. The European Union essentially gave Greece an ultimatum last week: Agree to 3 billion euros ($4 billion) in new austerity cuts or prepare for a messy default. Greece’s lead creditor, Germany, has clearly lost patience. But the Greek Parliament finally agreed to these minimal ($4 billion) spending cuts.
Even though the Greek Parliament passed these cuts, the people on the street might veto their government. Last Wednesday, there was a 24-hour general strike in Athens over the announcement of 15,000 job cuts. Greek workers chanted, “That’s enough, we can’t take it anymore.” Unemployment in Greece now stands at 18.2%, while the country’s GDP is expected to contract by 4% to 5% in 2012.
It looks to me like Germany and France are trying to make an example of Greece so that Italy and Spain do not follow Greece’s example. They point to Ireland, which was able to dig itself out of its fiscal mess with austerity cuts. The EU wants Italy and Spain to emulate the Irish rather than the Greeks, but it seems to me most of the world wants to see the major banks write down their Greek debt and just move on.
Meanwhile, the European Central Bank is playing “good cop,” making key concessions over its holdings of Greek debt to help reduce the country’s debt burden. Specifically, the ECB has agreed to exchange the Greek government bonds it purchased in the secondary market last year at a price significantly below face value — provided the debt restructuring talks are successfully wrapped up soon.
On Feb. 27, German Chancellor Angela Merkel is expected to hold an extraordinary meeting with the lower house of Parliament to influence German lawmakers. Many observers expect Greece to descend into even more chaos and to possibly leave the eurozone, which would cause a further run on euro banks.
The opinions contained in this column are solely those of the writer.
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