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Wednesday, 21 January 2015

Greece's Bailout Programs Are Not Working

Zero Hedge

Greece's bailout program is not working. After receiving hundreds of billions of Euros in new loans to stave off a sovereign default, Greeks are on the verge of electing a new government that may throw Eurozone politics into turmoil.

From the outset, this was always going to be a tricky one for European bureaucrats and lenders. Restoring the solvency of a state which historically had great difficulties in collecting taxes from its citizens was not going to be easy. Moreover, the crash exposed fundamental flaws in the Greek economy, which at the time turned out to be a leading indicator for other Southern Eurozone countries.

With the world still reeling from the Great Recession, in 2010 Greece applied for a rescue program as its funding costs soared once the fragility of its finances could no longer remain hidden.

It can be argued that if debt balances had been restructured there and then to levels where they could actually be paid off over an extended period of time, together with unpleasant but sensible fiscal policies – as we shall see, taking into account important differentiators of the Greek economy – the cost of the bailout could have been much more manageable.

Instead, what the Greeks got was even more debt – so much in fact that a restructuring program had to be implemented just a couple of years later – together with a strict austerity program to quickly restore the country’s fiscal position, eventually leading to rising waves of unemployment and general discontent. Greece’s sovereign debts now represent almost 180% of GDP, a jump of some 20 percentage points from the post-debt restructuring levels of 2012.

The Eurozone and the International Monetary Fund have provided an eye popping €254 billion in loans to Greece since 2010. More than half has been used for debt servicing, and another 19% to recapitalize the domestic banks. Only about 11% of the total was used by the government for non-financial items. Greek taxpayers thus underwrote the whole deal but only got a fraction of the funds, at a time of severe government cutbacks and never ending tax hikes.

It is hardly surprising that they are close to a breaking point. The radical left-wing Syriza party is now in pole position to win the elections on January 26, campaigning on a promise to write off at least a third of Greece’s total debt and alleviate the austerity measures.

How things will play out in Greece and abroad is anybody’s guess. But it is important to consider the factors which have contributed to the current state of affairs.

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See also: Germany Prepares for Possible Greek Exit from Euro-zone


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