In anticipation of €26 billion ($37.4 billion) in spending cuts and tax increases to reduce Greece’s deficit over the next five years, unions called for strikes. Affected services included public transportation, schools, hospitals, and media. In addition student demonstrations in Athens turned violent as protesters hurled bottles and firecrackers at police.
The austerity measures are in return for last year’s €110 billion EU/IMF debt bailout. A good portion of the proposed cuts will be to public sector salaries, defense and health care spending.
Was the bailout enough to keep Greece afloat? According to the Wall Street Journal’s scorecard they could have used about €151 billion, which means they should borrow about €40 billion more to plug last year’s hole. The tab has grown in the interim and markets are demanding 15 percent to lend to Greece. S&P rates Greek bonds “in deep junk territory.”
Charles Forelle at Brussels Blog offers four possible solutions: 1) Modify the current measures by extending the time horizon to pay back the bailout, “plow ahead with privatization”, and restructure the terms of the bailout loans 2) Give Greece more bailout money, 3) Delay paying creditors in exchange for new bonds that are paid off later, and 4) Tell lenders to take a “haircut” today.
Each of these comes with its own set of repercussions: political, economic and fiscal. The choice will depend on which fallout Greece’s government want to face. Markets have already reacted to yesterday’s strikes in Athens (and S&P’s warning to Portugal’s banks). A round of euro selling was touched off by investors concerned that Greece is likely to default again.
Surowiecki suggests this may be reason to breathe a little easier. The biggest debtor nations in the EU owe three times as much relative to GDP as do their high-debt counterparts in the US. Plus, the states can count on a federal bailout.
Yet, neither of these thoughts are entirely comforting.
Secondly, a half century of intergovernmental infusions from D.C. in the form of transfers,Medicaid, and stabilization money hasn’t kept the states afloat. Quite the contrary the erosion of fiscal federalism has meant a loss of states’ control over spending and policy.