By Simon Bradley and Andrea Ornelas
Greece is facing painful economic austerity measures to avoid a chaotic default that risks sucking the eurozone deeper into a debt crisis, Swiss experts say.
Protesters blocked Greek ministries and state workers went on strike on Tuesday while international debt inspectors ended their review of reforms saying the debt-ridden nation was likely to receive urgent aid to keep paying its bills.
As European Union leaders rush to finalise a wide-ranging bailout deal to try to stop the Greek crisis from spinning out of control, inspectors from the European Union, International Monetary Fund (IMF) and European Central Bank – known as the troika – said an €8 billion ($11 billion) loan tranche should be paid in early November.
But they warned that despite some fiscal progress, a privatisation drive and structural reforms were falling short.
Final approval on the loan will not come before the inspectors present a full report to eurozone finance ministers and the IMF board in a week’s time.
Greece, in recession and struggling to contain a public debt expected to hit 162 per cent of gross domestic product (GDP) this year, has promised wide-ranging austerity measures, including deep wage cuts for many public sector workers, huge layoffs and tax hikes that will hit middle class Greeks hard.
But EU and IMF officials have repeatedly criticised Athens for delays in implementing the reforms and eurozone ministers have deferred any release of the aid by a month to November to maintain pressure on the Greek authorities – a move widely predicted by Swiss economists
The Greek government had promised to reduce its 2011 deficit to 7.4 per cent of gross domestic product (GDP). But it recently announced it is projected to be 8.5 per cent of GDP – down from 10.5 per cent in 2010.
The economy is slowing faster than expected: this year GDP is due to drop by 5.5 per cent rather than 3.5 per cent.
The troika confirmed Greece would miss its 2011 deficit target because of a deeper than expected recession but also slippages in implementation. Additional measures, if applied rigorously, should be sufficient to meet 2012 targets.
But it said even more belt-tightening would be required to achieve 2013-2014 targets and that should be in place by mid-2012.
Greek Finance Minister Evangelos Venizelos welcomed the report, saying Athens would catch up with recommended structural reforms to make the economy more competitive.
He rejected any notion that Greece could be forced out of the common currency.
“Greece is and will always be a member of the euro zone, a member of the euro,” he told a press conference in Athens.
Janwillem Acket, chief economist at the Swiss private bank Julius Baer, told swissinfo.ch that the Greek financial crisis had created a huge dilemma.
“We have the impression that in trying to cure the sick patient, the doctors are actually killing him. But the patient did not correctly follow their course of medicine; there was no discipline and this means that all efforts to cure Greece are frustratingly difficult,” he said.
Unfortunately the risk that Greece is declared bankrupt by Christmas – while remaining in the eurozone – is growing, said the Julius Baer economist.
Simon Evenett, professor of international trade and economic development at St Gallen University, said the next three weeks would be full of speculation.
Greece left everything to the last minute and is now paying the consequences for a lack of economic rigor, he said.
Stormy end of year
“An inability to collect tax and stagnant export earnings both reduce the likelihood of a full repayment of debts. Both in fact are central to the solvency problems facing Greece, along with a gigantic state budget deficit created by greater stimulus spending during the global economic crisis,” said Evenett, in a recently penned essay “When will Greece finally default?”
“I don’t believe the calm will return. It is difficult to estimate when the instability will end. There is Greece, but we must also look closely at Spain and Italy, who are also working on their own reforms,” he told swissinfo.ch.
The EU postponed a summit by a week on Monday to allow time for a broader solution to the debt crisis. The leaders of Germany and France gave investors some hope on October 9 by promising a plan soon to recapitalise Europe’s banks.
They gave no details of their proposals but said they would also cover closer euro zone integration and steps to tackle Greece’s debt mountain and prevent financial market contagion.