Ben Chu: Nation takes its medicine – but condition may worsen

A Greek exit from the eurozone looks less of a risk today, but it has not disappeared

Related Topics

The Greek Godot finally arrived. After an interminable wait, the deal has, at last, been done. The government of Prime Minister Lucas Papademos will make further budgets cuts, equal to 1.5 per cent of GDP this year. This opens the way for the Greek private-sector bondholders to accept their "haircut", giving Athens around €100 billion in debt relief. This shared public- and private-sector sacrifice will unlock the €130bn aid package for Athens from the European Union and the International Monetary Fund. Now Greece should be able to make its €14.4bn bond redemption payment on 20 March. The risk of a disorderly default next month, which could set off a broader financial cataclysm, has receded.

Will there be a sharp recovery of confidence in the markets in response? There wasn't much sign of it yesterday. A Greek deal had been pretty much "priced in" by investors, meaning there is unlikely to be any impressive rally from financial markets. And fears of financial contagion from Greece to other weak eurozone states had already eased thanks to the €500bn injection of liquidity into the eurozone banking system by the European Central Bank last month. There is also due to be a further blast from the ECB's liquidity "bazooka" at the end of the month.

So crisis over? Even with the debt writedown and new aid, Greece will be left on course for a debt pile worth more than 120 per cent of the country's annual output by the end of the decade. "This is woefully insufficient as far as putting Greece's public finances on a sustainable footing," warns Nicholas Spiro, of Spiro Sovereign Strategy.

Many are sceptical over whether the country will make it to 2020 without mishap. Greece needs growth to have any hope of paying its debts. Yet the Greek economy is still in freefall, with a 2.8 per cent contraction pencilled in by the European Commission for 2012. Germany is insisting on a policy of draconian austerity from Athens, which has only deepened the depression. Unless the medicine suddenly starts working, Greece is inevitably going to need still more debt forgiveness. And that will mean more losses for private bondholders – or more financial support from other European governments.

A Greek exit from the eurozone looks less of a risk today, but it has not disappeared. Many analysts still put the chances at around 50 per cent. Life within the single currency looks agonisingly difficult for Greece. It needs to bring its labour costs into line with ultra-efficient Germany through grinding price deflation and a decade of squeezed living standards. But the shock of exit could be more traumatic still. Most Greek savers would pull their money from the banking sector at the first hint of a withdrawal, to prevent a massive reduction in their real wealth from devaluation. Financial and economic chaos would most probably follow. And for what benefit? Some economists argue that talk of an export boost from the reintroduction of a significantly devalued drachma is impossibly optimistic for an economy like Greece.

But Greek politics is a wildcard. The country is due to hold elections in April. A new government, under popular pressure, might decide not to honour the deficit reduction promises, prompting a fresh confrontation with the rest of Europe. A new administration might even decide to head for the exit. Desperate countries do desperate things.

European bigwigs are not exactly making Greece feel welcome. The Dutch EU Commissioner, Neelie Kroes, said this week that the single currency could survive without its troubled member. And Berlin is pushing for the financial aid to pass through a special bank account, which the Greek state will not be able to tap, from which debt interest payments would be deducted. That might be interpreted as a humiliation too far by Athens.

The agreement to release the new bailout cash must also be approved by the Bundestag. It is not just Greek politicians that need to sign up to this deal, but German ones too. The agonised wait is over. Let the agonised waiting begin.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Process Improvement Analyst (Testing)

£40000 - £45000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Service Delivery Manager - Derivatives, Support,

Negotiable: Harrington Starr: Service Delivery Manager - (Derivatives, Support...

Technical Account Manager - Java, FIX Protocol, FIX 5.0, C++

£30000 - £55000 per annum: Harrington Starr: Technical Account Manager - Java,...

WPF .NET Developer

£300 - £350 per day: Harrington Starr: WPF Analyst Programmer NET, WPF, C#, M...

Day In a Page

Read Next

The daily catch-up: heatwave update; duck tape and market socialism

John Rentoul
David Cameron's 'compassionate conservatism' is now lying on its back  

Tory modernisation has failed under David Cameron

Michael Dugher
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform