Greece’s debt-load is rising much faster than expected as the country spirals into a sixth year of depression, ratcheting up the pressure on Germany and Europe’s creditor states to accept debt-forgiveness for the first time.
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7:43PM GMT 31 Oct 2012
Finance minister Yannis Stournaras said public debt will reach 189pc of GDP, far higher than estimates of 179pc published just weeks ago.
The new estimates exceed the worst-case scenario sketched by the International Monetary Fund and demolish any hope that Greece can claw its way back to solvency. “Unless EU leaders come up with a sustainable solution and cut the debt burden, everything is going to fall apart in Greece,” said Simon Derrick from BNY Mellon.
The Greek economy is still caught in a vicious circle. It will contract by further 4.5pc next year, while the budget deficit will remain stuck at 5.2pc, according to forecasts in the 2013 budget.
The EU-IMF Troika is expected to give Greece an extra two years until 2016 to meet budget targets but the issue has already been overtaken by events.
The IMF now fears that the debt will still be 150pc of GDP in 2020. It has already stated that it cannot take part in any further aid packages unless the debt in on track to fall below 120pc.
The German, Dutch, Finnish and Austrian governments have for now dug in their heels on “haircuts” for official creditors, an explosive political issue in their own parliaments.
All losses so far from Greece’s default been concentrated on private investors. They have taken write-downs of 75pc, or nearer 85pc on current market prices. The scale of the debacle in Greece means that any future write-downs must come from taxpayers and the EU bail-out fund (EFSF).
Eurozone finance ministers failed to offer clarity on the Greek crisis in telephone talks on Wednesday, saying only that Greece should move “swiftly” to meet demands from theTroika.
“Before we agree to the next steps, we must await the Troika report and we need to be sure that Greece is implementing the measures,” said Dutch finance minister Jan Kees de Jager.
The Greek parliament is likely to pass a package of pension and public sector wage cuts next week but the margin is perilously thin. The Democratic Left party has withdrawn its support, while four PASOK socialist deputies are also in rebellion.
Greek trade unions have called a general strike to coincide with the debate. “The central aim is the rejection of the unacceptable, destructive and coercive measures,” said the GSEE union.
In Portugal, the parliament passed drastic tax increases on Wednesday to meet Troika deficit targets for next year, a marked change in strategy by the free-market government. Premier Pedro Passos Coelho said his government had already cut spending to the bone.
The austerity wave comes as unemployment hits a euro-era high of 10.6pc across the eurozone, reaching 25.8pc in Spain, 25.1pc in Greece, 15.7pc in Portugal and 15.1pc in Ireland.
A study by Britain’s National Institute Economic Review said the eurozone’s austerity strategy is “fundamentally flawed” and has become self-defeating. “Even on its own terms, it is making matters worse.”
The institute said synchronized fiscal tightening by a group of countries in the middle of a slump does deep damage to the productive economy and may actually worsen the debt ratio, pushing some countries into a “death spiral”.
It said the “fiscal multiplier” rises sharply when interest rates are already near zero and monetary policy cannot easily offset the budget squeeze. “We do not appear to be in normal times but in a prolonged period of depression, which we define as when output is depressed below its previous peak. The impact of fiscal tightening during a depression may be very different,” said the paper by Dawn Holland and Jonathan Portes.
While debt may fall, it cannot keep pace with falling output, as has occurred in Greece. “Our simulations suggest that coordinated fiscal consolidation has not only had substantially larger negative impacts on growth than expected, but has actually had the effect of raising rather than lowering debt-GDP ratios. Not only would growth have been higher if such policies had not been pursued, but debt-GDP ratios would have been lower.”
“The direct implication is that the policies pursued by EU countries over the recent past have had perverse and damaging effects.”
German Chancellor Angela Merkel has implictly acknowledged the limits of her austerity strategy, calling for a eurozone growth fund able to command up 2pc or even 4pc of the region’s GDP to channel investment to regions trapped in slump.
The fund is not a fiscal stabilizer, and is in any case unlikely to be up and running for years. The proposal may help mitigate the next crisis, a decade or more ahead. It offers no solution to the immediate crisis.