The EU has “reached a deal” to bail out Greece in order to protect the European economy. EU President Herman Van Rompuy did not disclose details of the deal, which will hopefully help avoid a contagion effect in other counties as well as steady the value of the euro. Greece currently owes $419 billion, and is using 11.6% of its GDP to service debt. The BBC has more:
There was an instant reaction on the markets, where traders welcomed news of the deal. Major European markets rebounded from earlier falls and the euro rose against the US dollar.
The BBC’s Dominic Hughes in Brussels says the details of the EU help for Greece may not emerge until Monday, when eurozone finance ministers will meet. EU rules prevent the eurozone from collectively bailing out Greece, but the debt crisis has forced EU leaders to seek ways to help nevertheless.
Any EU budget support for Greece is likely to come with stringent conditions, to ensure that Athens fulfils its austerity plans and to reassure European voters that their taxes will not be diverted to propping up Greece.
Greece’s deficit is, at 12.7%, more than four times higher than eurozone rules allow.
(Note that several other countries–above and beyond the PIIGS–have deficits that are too high for eurozone rules.)
In order to combat its debt problems, Greece plans to freeze the pay of public sector workers, increase gas prices, and raise the retirement age, according to the BBC. Greek workers reacted to the news with widespread strikes.
The Observer’s Larry Elliot puts the Greek situation into context:
As far as the European commission was concerned, matters were simple. By a mixture of incompetence and deceit, the Greeks had allowed their deficit to balloon out of control, putting the credibility of monetary union at risk. But the reality is more complex. A crisis that began with the previous government in Athens cooking the books developed into three interlocking themes – the reluctance of the Greeks to swallow the nasty budgetary medicine prescribed for them, the medium-term outlook for the single currency and Europe’s long-term role in a rapidly changing global economy.
Nouriel Roubini, economics professor at the Stern School of Business at New York university, said in Davos last month: “If Greece goes under, that’s a problem for the eurozone. If Spain goes under, it’s a disaster.” He has been strongly advising the beleaguered socialist government of George Papandreou to seek help from Washington, a view shared by Harvard professor Kenneth Rogoff, former chief economist at the fund: “Greece is going to end up with an IMF programme of some sort in order to get credibility.”
Rogoff, who has just published a book on eight centuries of financial crises, said that Greece was “a serial defaulter”. Since the modern Greek state was founded in 1830, the country has, on average, been in sovereign default every other year and had been through five big defaults in less than 200 years. “Greece has been worse than any Latin American country,” he adds.
The IMF would probably already be involved were Greece outside the eurozone. But according to Charles Grant, director of the Centre for European Reform, the commission wants to keep the fund at arm’s length because it would give the Americans a say in single currency affairs, a blow to European pride.
As Yves of Naked Capitalism puts it, ‘the (European) monetary union left a lot of critical issues and mechanisms in the “to be sorted out later” category, and “later” has arrived.’ In other words, keep an ear to the ground for political maneuvering. Those politics grow even more international if the US-influenced IMF wants in. Naked Capitalism’s Yves postulates that when you factor in the interdependency of all major international players,
a fall in trade, perhaps not as dramatic as what occurred in the 1930s, may be a necessary element of a return to stability. No one seems to be thinking along those lines. And that increases the odds that we will get that result, not via design, but via protectionist responses that escalate into trade wars.
So terms like “sovereign debt crisis” and “Greek bailout” might be misleading. We’re potentially dealing with a very international situation here.