Greece secures last-minute bailout deal, but it will hurt

Greek leaders have clinched a last-minute deal demanded by international lenders in exchange for a bailout that would prevent the country from defaulting on its sovereign debt.

All night talks between Prime Minister Lucas Papademos, the leaders of the three parties in the Greek government coalition, and officials from the European Union and the International Monetary Fund (IMF) continued into Thursday morning, when they finally reached an agreement on an austerity program, the condition set by international lenders for giving Greece fresh money necessary to pay debt due in March. 

Traveling on to a meeting of eurozone officials tonight in Brussels, Finance Minister Evangelos Venizelos is expected to present Greece’s commitment to a tough reform program, saving up to €3.3 billion ($4.4 billion) in 2012. 

Greece was the first eurozone economy to require international financial aid to stay afloat in the current sovereign debt crisis. In 2010, the government disclosed debt topping 140 percent of gross domestic product. A first bailout package of €110 billion ($146 billion), decided in 2010, proved too little.

In order to pay back €14.5 billion ($19.2 billion) of bonds due March 20, Athens needs the first tranche of a second bailout package of €130 billion ($172.5 billion) that was agreed to at an EU summit last year. But the international lenders – the troika of the EU, IMF and European Central Bank (ECB) – want to see Greece make serious, likely painful efforts to cut back its state budget and make its economy more competitive before they hand out more money – and patience is running thin.

“We need Greece to put concrete commitments on the table,” said EU Commissioner on Monetary Affairs, Olli Rehn, in Brussels. Thomas Steffen, undersecretary for Europe in the German finance ministry, is more blunt. “Greece has made appallingly little progress since 2010,” he says. “The time for announcements is over – we want to see actions.”

The measures decided last night sound radical, though. The party leaders agreed to lower the minimum wage in Greece by 22 percent and to cut 15,000 public sector jobs this year. They also indicated they are considering a freeze in private sector salaries until the national unemployment rate decreases from its current level of 19 percent to below 10 percent, although it is unclear how that could be done. 

Whether the current Greek government or any future one – Greece is holding general elections this year, possibly as early as April – can implement these tough measures is another question. The country has been slow to implement austerity measures agreed to previously and resistance among the Greek trade unions is stiff. On Tuesday there was a 24-hour strike and sometimes violent protests outside parliament in Athens, and the latest austerity package was greeted by calls from the two biggest unions for another 48-hour walk-out on Friday and Saturday.

Henning Klodt, researcher at the Kiel Institute for the World Economy, can sympathize with the Greek protests and doesn't see the country's difficulties easing anytime soon. He calculates that even at low interest rates and with a recovering economy, Greece would need a budget surplus of about 10 percent of GDP for several years in order to become solvent again.

“No industrial country has reached such a rate in the past decades,” Mr. Klodt says. “It’s just not realistic.”