Greece's Desperate Measures

After days of intense negotiations during which its membership in the eurozone seemed to hang by a thread, Greece finally reached an agreement today on the measures that will accompany the new loan package from its European partners and the International Monetary Fund.

The measures agreed on are draconian. They include a 22 percent cut in the monthly minimum wage, reducing earnings from 751 euros to 586 euros per month. For people under 25, it will be even lower, down to 511 euros, and any increase before 2016 is ruled out. In addition, further reductions to the minimum wage may take place in July. Meanwhile, all automatic wage increases that are included in collective-bargaining agreements will be frozen until unemployment falls below 10 percent (it is currently at 20.9 percent). Employers are also considerably strengthened in their bargaining position vis-à-vis the unions through changes in arbitration regulations and a contraction of the time period (from six to three months) during which an expired wage agreement continues to be valid. The responsibility of employers to maintain pensions are also reduced in order to further lower the cost of hiring. There will likely be more cuts in primary pension benefits in the next few months. On the public-sector side, state employee rolls will shrink by 150,000 people by 2015, including 15,000 by the end of this year.

It should be noted that the Greek budget for 2012 was premised on a projection of a 2.5 percent contraction in gross domestic product (GDP). According to the draft document of the agreement, the recession is now forecast to reach 4 percent to 5 percent this year—the fifth consecutive year in which Greece’s income shrinks. Given the death blow to domestic demand that the new wave of austerity will produce, this could turn out to be too optimistic: The Greek economy, already seriously depressed, will grind to a halt.

The next few days are critical. Assuming the eurozone’s finance ministers give their stamp of approval to the new loan package today, the focus of the drama will shift to the negotiations on the reduction of Greece’s monstrous public debt, currently put at 159 percent of GDP.

Next Monday is the deadline for the initiation of the bond-exchange process with Greece’s private creditors, who hold 206 billion out of 350 billion euros of Greece’s debt. Negotiators from the International Institute of Finance (IIF), the global banking lobby group, are meeting investors in Paris to present to them the deal reached with the Greek authorities, which features an average interest rate of 3.4 percent on the new, 30-year bonds they will receive, whose face value will be cut in half. Given that the aim of the October 26 agreement was to cut 100 billion euros from Greece’s debt burden and that many private creditors will be unwilling to participate in the process, it is expected that next week, Greece will pass a law retrofitting Greek government bonds with collective-action clauses, thus forcing recalcitrant bondholders to take losses.

On Sunday, ahead of Monday’s bond-exchange deadline, the Greek Parliament will vote on the debt haircut and the new austerity package. The session is expected to be raucous. Aside from the parties of the left, which angrily oppose the new agreement, there is growing turbulence in the ranks of the two main parties, PASOK and Nea Democratia, which hold between them nearly 80 percent of the seats.

In the case of the ostensibly socialist PASOK, whose parliamentary group has borne the brunt of supporting harsh austerity legislation for the last two years, a number of members of parliament have openly stated that they will not vote for the new cuts. The leadership vacuum in the party (George Papandreou is on his way out; the next leader is not yet in) and the drubbing expected in the upcoming elections make PASOK parliamentarians eager to save their seats and to escape public derision. In Nea Democratia, populist forces inspired by leader Antonis Samaras’s anti-austerity rhetoric (the party voted against the original memorandum with the troika) are now horrified at his support for the Papademos government and what it entails.

The road ahead remains filled with danger. Eurozone governments, too, must ratify the new loan agreement once it is finalized. A new round of strikes and demonstrations has already begun in Athens. The bond-exchange process, supplemented by collective-action clauses, needs to be concluded without causing too much market turmoil. The Europeans are fast losing patience with what they perceive as Greece’s inability to swallow the prescribed medicine. The Greeks are increasingly livid with the Europeans, in particular the Germans, for what they perceive as disastrous economics enforced by the politics of colonialists.

On March 20, Greece needs to repay 14.4 billion euros it currently does not have to its creditors or go into default. Everything must be settled before then. Time is running out.