Last Updated: Wed May 16, 2012 16:29 pm (KSA) 13:29 pm (GMT)

Eman El-Shenawi: Bailing out Greece has tipped it over the eurozone’s edge

The bailout of Greece is leading to further fiscal instabilities within the country. (Reuters)
The bailout of Greece is leading to further fiscal instabilities within the country. (Reuters)

Greece was bailed out under rules it wasn’t ready for. The attempt to save the country from defaulting has actually tipped it over the edge and foreshadows a eurozone exit. Why? Because the bailout never ensured the country’s fiscal stability. If anything, the rescue package, as I have noted in a previous blog, was more a bailout for investors in Greek bonds, mostly American and German banks, which in turn would buy time to stabilize the 17-nation euro zone currency bloc. But it never gave any promises to build a stronger Greece.

Those who said the bailout − an attempt by the eurozone and the International Monetary Fund to drag one of its limbs back into the game − would lead to further fiscal instabilities, could possibly be right. And here’s how.

Let’s remind ourselves that a classic IMF rescue package involves the fund only lending money to countries after they devalue; not before. But with Greece, this preventative measure was taken to provide loans worth 130 billion euros ($170 billion) presumably before things got worse. This installment of the loan was only a fraction of the country’s 350-billion-euro debt fiend.

But the bailout landed Greece in several sticky messes, particularly on the bondholder front, when all but some private creditors accepted a massive loss on their holdings of Greek government bonds.

On Tuesday, Greece is repaying 436 million euros in maturing debt which will cover the private creditors who refused to take part in the unprecedented write-down. And now, Athens is now very likely to default on its original creditors (the IMF and Germany), after bondholders “had much higher haircuts than they would have experienced had the bailouts not occurred,” explains Andrew Lilico, Director of Europe Economics.

The bondholders’ loss was essentially created by the bailout after the country was “bailed out with loans from the IMF, ECB and EU that have been treated as senior to the bonds of the private sector,” writes Lilico, meaning that any losses were first being experienced by the private sector as all loans to the IMF, ECB and EU were to be repaid with a higher priority.

Political mess and false threats?

Stuck between a barrage of rocks and a surplus of hard places, Greece also entered a political wrangle to form a government after May 6 polls saw voters widely reject the harsh austerity terms of the EU-IMF debt deal.

Europe's policy elite have already admitted that it may prove impossible to keep the single currency intact if Greece remains part of the bloc, with a possible “real impact on economic growth across the European continent … It's the uncertainty that's causing the damage," British chancellor, George Osborne, said in Brussels on Tuesday.

But while the Eurogroup ministers continue to warn Athens to respect the conditions of austerity and reform under a March deal for a second bailout, one could question whether this is all about raising a false threat.

"It may well be that eurozone leaders would raise the threat of Greece being obliged to leave the eurozone if it fails to comply with bailout terms, so as to sway Greek voters to support pro-bailout parties,” Stephen Lewis, economist at Monument Securities told the Guardian.

But if the threat is credible, then the EU would have to start elaborating measures to facilitate Greece's departure from the eurozone well before the Greek election took place.

“Otherwise, Greek voters would assume eurozone leaders were bluffing," Lewis said.

Justin Dargin, a Geopolitics Scholar at Oxford University, says the tough austerity measures, which include 15,000 public-sector job cuts, the liberalization of labor laws and lowering the minimum wage by 20 percent from 751 euros a month to 600 euros, was too much of a burden to undertake for Greece.

“Austerity measures are pushing Greece to exit [the eurozone] if it doesn’t meet these measures. A bailout package agreed to that set the terms of austerity measures have imposed a significant social cost.”

There is also no sign for eurozone leaders to renegotiate the upcoming bailout deal to keep those against the austerity measures happy. Syriza, the far-left Greek party which came second in last week polls, insists any new government must radically renegotiate the austerity measures agreed upon for EU-IMF loans.

“Syriza views austerity measures are destroying a generation of Greeks and the social fabric, and that the human cost is too high. They have indicated that it is preferable to leave the Eurozone than to absorb the debilitating austerity obligations.,” says Dargin.

While a “Grexit” may not be as economically disastrous as some of the most dire predictions, perhaps leaving room for EU partners to focus all their energies on how to support the mounting woes in Spain and Italy, it still would be viewed as a “severe blow to the eurozone and the European Union,” says Dargin.

“It would be a crisis of confidence in what the eurozone stood for. Not necessarily a failure, but a severe blow to the bedrock of fiscal and economic stability that the euro represented.”

And it would also be a setback for Greece as well. “One of the things that the eurozone represented for Greece was its coming out of the closet, joining the established Western “club,” and having all of the right credentials. It is a member of NATO. a member of the EU and a eurozone member; if it were to depart from the eurozone, it could be viewed as a step backward for longterm national development.”

The bailout prevented a Greek default, and in turn prevented knock-on defaults of a couple of other developed economies within the bloc. But talk of the return to the drachma has honed in on a rigid fiscal and political muddle. Athens should really take a few steps back.

(Eman El-Shenawi, a journalist at Al Arabiya English, can be reached at: eman.elshenawi@mbc.net.)

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