'The Troika's Policies Have Failed' European Doubts Growing over Greece Debt Strategy

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Part 2: 'The Troika's Policies Have Failed'

The plan to save Greece, it turns out, is based on assumptions that have proven to be hopelessly optimistic. Europe's leaders had assumed that Greece would quickly return to economic growth. But the severity of the austerity measures demanded makes that doubtful. Cuts in salaries and social spending have resulted in a dramatic drop in demand, which has accelerated the economy's contraction. Tax revenues have plunged as a result, leading to the need for even more spending cuts.

That is hardly a recipe for coming to terms with the country's debt problem, particularly given the lack of clarity regarding the degree to which Greece's private creditors will participate in the new bailout package. The International Institute of Finance (IFF), which is representing private holders of Greek sovereign bonds, reached an agreement on voluntary debt relief with reports emerging on Monday that the debt swap would take place in March. But several details remain open and Germany's Finance Ministry is now saying that Germany won't give final approval for additional aid to Greece until those details are ironed out.

The agreement means that private creditors will have to write down between 70 and 75 percent of their claims. In exchange, they will receive new bonds with longer maturity periods and significantly lower yields. The new bonds will be guaranteed by the euro backstop fund, which provides added incentive for creditors to participate in the swap.

Yet it remains unclear whether a sufficient number of investors will ultimately go along with the deal. Only if 90 percent of private bond holders agree to participate will Greece be able to hit its target of €100 billion in debt relief. Financial insiders claim that the biggest resistance to the swap continues to come from hedge funds. They have insured themselves against a Greek insolvency and would actually profit should it come to pass.

Yet More Pension Cuts

Yet even as international investors are hesitant, the Greek population has passed its judgment. Greeks, it would appear, no longer want to be rescued if it means even lower minimum wages and yet more pension cuts.

The Athens-based left-leaning daily To Vima urged its government last week to break off the talks "immediately" and negotiate an alternative arrangement with the United States. Greece still had the "power to blow everything up," the paper said, adding that this was "the only remaining path."

As if to lend impetus to the radical suggestion, tens of thousands of Greeks joined together late last week in long protest marches through downtown Athens. Hanging from a small tree in Syntagma Square, across the street from the building housing Greece's parliament, was a banner reading: "We've had enough. We won't play along anymore."

The number of those who agree with such sentiments is growing -- even among those who actually support the reform process, such as Dimitris Daskalopoulos, the head of the Hellenic Federation of Enterprises (SEV). Daskalopoulos has himself been the target of paint-bomb attacks launched by protesters. But, now, he sits in his federation's headquarters not far from Syntagma Square -- protected by access codes and security gates -- and says: "The troika's policies have failed," referring to the representatives of the IMF, the European Commission and the European Central Bank (ECB) which have forced Athens to undertake austerity in exchange for the second aid package. Though it would have been unthinkable just a short time ago, his association now finds itself backing some of the same positions as the unions.

For example private sector wage cuts. According to the terms of the new pact, the Greeks are obliging themselves to cut the gross minimum monthly wage by 22 percent, from €751 to €568. Likewise, there is also talk of abolishing the 13th and 14th months' salaries in the private sector.

Suffocating the Last Functioning Bits of the Economy

The problem in Greece, though, says Daskalopoulos, are not the salaries and wages. Rather, it is the structures that make the country a problem case. The troika has failed, he says, to convince Greek politicians to accept the reforms.

There has indeed been practically no progress in opening the labor market, and the revenues generated by privatizing state-owned assets are lagging well behind projected targets. Whereas plans had called for such sales to bring in €5 billion in 2011, they only netted €1.7 billion. Still, this hasn't moved the troika or the Greek government to adjust their high targets for 2012: The plan calls for €10 billion in privatization proceeds for the year, half of which is supposed to come in the first three months alone.

Although legislators have passed one new tax law after the other, the Greeks continue to owe their state €42 billion in unpaid taxes.

The troika's new loan agreement also calls for Greece to cut 150,000 jobs from its massively bloated public sector, with 15,000 of those cuts to be carried out this year. The target for 2011 was even higher, but only 6,000 civil servants actually left their positions, and most of those would have gone into retirement anyway.

Instead of insisting on reforms in the places where they're needed, international creditors and their austerity measures risk suffocating the last functioning bits of Greece's private sector, warns SEV chair Daskalopoulos. "If we continue the way we're going, we'll be left with no foundation at all for economic recovery."

Politicians, meanwhile, are trying first and foremost to save the one thing that in all likelihood can no longer be saved: their own power.

Antonis Samaras, leader of the conservative party Nea Dimokratia, told television cameras during last week's 13-hour marathon negotiation session that he couldn't support the pension cuts required by the new agreement -- only to accept all demands a short time later.

A date for the upcoming elections has not even been set, but one thing seems certain already: Angry voters will make short work of the established parties. Socialist party Pasok, which held the position of prime minister with Giorgios Papandreou until November 2011, currently manages just 8 percent support in public opinion polls. Samaras of Nea Dimokratia is putting his all into an attempt to still achieve his great dream of becoming prime minister. His party is currently at 30 percent in the polls, but that number is dropping.


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