Photo: New York Times Syndicate
Elections in Greece dominated headlines this weekend, as sweeping rejections for austerity compromised support for leading political parties PASOK and New Democracy.This poses new challenges for European leaders, who continue to demand more cuts from the country, whose profligate spending forced it to see the first developed market default in more than 60 years.
Here’s our quick look at what’s been happening in Greece, the challenges it still faces, and what’s next.
Before its most recent bailout, Greece's public debt amounted to 165.3 per cent of GDP. The country eliminated nearly €100 billion ($130 billion) from those €335.6 billion in obligations in the first advanced economy default in more than 60 years back in March, but most experts project that Greece's public debt to GDP ratio will remain above 100 per cent past 2020.
The Greek government has been forced to cut expenditures, exacerbating the downturn. Its 2012 austerity budget cut spending by 1.5 per cent of GDP, and will likely cause the country to contract by about 5 per cent this year, at best.
Austerity measures meant to make the Greek economy more competitive in the long-term have been hard to stomach in the short term.
Some scary details of the 2012 austerity budget, which implemented €325 million in spending cuts:
- Reduction in minimum wage by 20 per cent
- 15,000 public sector job cuts
- Reductions in pension payments
- Reductions in spending for medicinal spending
A strong majority of Greek citizens still support the country's membership in the euro currency, however a harsh austerity program has compromised this support.
That was reflected in the latest round of parliamentary elections, in which fringe parties received an unprecedented level of support by campaigning against more austerity measures. At the same time, the traditionally dominant PASOK and New Democracy, which have supported EU-imposed regulations despite the occasional bickering, won only about 35 per cent of voter support. They generally win a combined 80 per cent.
The burden for Greece's debt has shifted away from the private sector and towards the EU public sector.
After two bailouts, the troika (EU countries, the European Central Bank, and the IMF) has loaned Greece €77 billion. The ECB also owns an estimated €50 billion in Greek bonds, purchased in a failed attempt to keep borrowing costs down for the troubled country. That leaves only about €90 billion in private sector debt.
In the event of a second Greek restructuring, the public sector would be forced to pick up the losses.
The fact that the European public sector would carry most of the burden in the event of another restructuring alters its incentives to see Greece survive.
On one hand, EU leaders will want to protect their existing investments, and therefore might be more likely to donate more money to the cause of keeping Greece afloat. Then again, they could also decide to quit while ahead, choosing to withhold future funding because they foresee even bigger losses in the future.
A lot of this depends on political behaviour in Greece, which will has little hope of surmounting its debt problems and returning to growth anytime soon without leniency from the troika. If the troika refuses to be lenient, the fact that a deeper restructuring would have to come from the public sector would likely force Greece to exit the euro.
In order to receive its next round of bailout aid, the Greek government must commit to another reduction in spending by the end of June, totaling about 7 per cent of GDP in 2013 and 2014.
Analysts expect this to prove difficult with a fractured parliament, particularly one that has little support for more austerity.
If the Greek government does not approve these measures, the troika is likely to withhold the next round of bailout funding. According to Citi, the country is slated to receive €31.2 billion in the second quarter.
Failure to pass new cuts could result in new elections, and continued rejection of troika demands could ultimately terminate bailout programs.
This would leave Greece with no choice but to default on its outstanding debts. Because so much of this debt is held by the EU public sector, this would probably result in an exit from the eurozone.
Public protests against austerity measures have been increasingly violent. Despite allegations that they are led by anarchists, it is clear that more and more Greeks are publicly rejecting efforts by foreign European leaders to depress their economies and inflict a high human toll.
The Greek government has not appeared particularly threatened by such public demonstrations in the past. But this could change materially, particularly if the leading coalition tries to shove austerity measures through parliament with a thin majority.
The leadership and composition of Greece's new coalition government, if politicians can form one at all
French and Italian leniency with Greece, particularly with the new leadership of French president elect Francois Hollande
The severity of popular protests against any government disposition towards austerity