Monday, February the 6th, was expected to be a decisive day for Greece. Then it was initially planned the finance ministers of the eurozone to approve the second bailout for the country, provided that there was a deal with the private lenders to write off 50% of the Greek debt and that Athens had agreed to the demands of the EU and the IMF for more serious reforms. However, the Eurogroup meeting has been re-scheduled for Wednesday because the above conditions have not been met yet. And the bad news for everyone is that the bailout is likely to be bigger than previously agreed.
At the Eurozone Summit on 21 July 2011 it was announced that Athens would receive a 109 billion euro loan from the EU and the IMF and the private sector would further contribute with 37 billion euros in three years. Then negotiations started on the essence of the private sector involvement (PSI), presented by the Institute of International Finance. At the nail-biting euro summit on 26 October, after a sleepless night of negotiations with private creditors, a new deal was announced: the creditors will receive a 50% haircut of the Greek bonds value and the euro area will sweeten their losses with 30 billion euros. Separately, Greece will get a second bailout worth 100 billion euros. So the total cost of the second rescue for Greece has reached 130 billion euros. However, it is being largely commented in the last days that Greece would require an additional 15 billion euros, so the total loan will reach 145 billion euros.
Meanwhile, the negotiations with private creditors are going on slowly and painfully, and fewer analysts believe they will deliver as expected. The deal aims to reduce the Greek debt to sustainable levels - according to the EU and the IMF that is 120% of GDP by 2020. However, even this level of indebtedness seems impossible for Greece to bear, in time of ongoing attempts to impose severe budget constraints and carry out structural reforms, amid poor economic forecasts.
Paradoxically, it seems easier for the Greek government to agree with the private creditors than to finally start implementing the necessary structural reforms. Despite all the promises, so far the reforms remain only on paper and many analysts see a major problem with the Greek authorities' complete inability to implement these in practise. There has even been a proposal to appoint a special budget commissioner to manage Greek finances. It has never become clear whether the German idea has been even discussed by the European leaders at their last meeting, as some of them denied its existence at all.
The fact is, however, that the EU and the IMF insist the Greek government to implement additional reforms and to cut spending for 2012 by another 1% of GDP. For this purpose, the government should reduce the minimum salary and bonuses, conduct pension reform, and cut 150,000 jobs in the public sector within three years. Moreover, the EU expects from all political parties in Greece to sign a letter in advance that they would respect their commitments. The Union has reasons to distrust Greece, given the experience of the last two years and the new government`s establishment.
Although headed by Lucas Papademos, a respected economist both in Greece and Brussels, the government consists of 49 (?!) ministers from three parties. Unlike the government of Mario Monti in Italy, the so called national unity government in Greece does not seem formed to assume responsibility for serious reforms but rather to dilute responsibility, in order to ensure that no party would lose the support of its voters. Moreover, there are elections coming in Greece and nobody wants to make their hands dirty with unpopular measures.
But the time to March is quickly running out, when the country has to repay debt worth 14.4 billion euros. We remember cases where, although not meeting the conditions, Greece still received the next tranche of its current 110 billion euros loan to avoid bankruptcy. But the loan expires this year and whether there will be a new one is entirely in the hands of the Greek government.