Greek political leaders on Wednesday night were unable to come to agreement on a European Union demand for 300 million euros worth of pension cuts. The snag could jeopardize an EU aid package worth 130 billion euros — and Greece’s ongoing membership in the euro zone. Elsewhere, though, progress appears to have been made.
At stake is a €130 billion ($170 billion) bailout package, Greece’s future in the euro zone and the potential damage that a disorderly national insolvency could do to European banks and the global economy. A mere €300 million in budget cuts seems but a trifle in comparison.
That, though, is the amount by which Greek political party leaders have come up short in their weeks of talks aimed at fulfilling European Union demands that they push through additional savings worth €3.3 billion as a condition for the vast bailout. On Thursday, Finance Minister Evangelos Venizelos is off to Brussels for meetings to finalize the aid money. But the failure to agree on all the belt tightening measures sought by the EU has now put the bailout in doubt.
Venizelos implored the party leaders to reach a quick agreement, saying that the country’s “survival over the coming years” depends on EU help. “It will determine whether the country remains in the euro zone or whether its place in Europe will be endangered,” he said, according to the Associated Press. “There is not room for any other expediency. We must look Greeks in the eye, look at the national interest and the interest of our children.”
The unsuccessful conclusion of the austerity talks on early Thursday morning comes despite increasing pressure from the so-called troika of Greek creditors — made up of the European Commission, the European Central Bank and the International Monetary Fund — and widespread exasperation in European capitals.
At a Monday press conference in Paris, German Chancellor Angela Merkel said “there can be no deal if the troika proposals are not implemented. Time is of the essence. Something needs to happen quickly.” She was seconded by French President Nicolas Sarkozy, who said “our Greek friends must fulfil their responsibilities. They have no choice.”
On Tuesday, European Commissioner Neelie Kroes said that the euro zone could survive Greece’s departure from the euro zone (an eventuality that has now been dubbed the “Grexit” by Citygroup economists Willem Buiter and Ebrahim Rahbari). “When one member leaves, it doesn’t mean ‘man overboard,'” she told a Dutch newspaper.
Greece is facing insolvency if the aid deal with the EU isn’t finalized soon. The country must make a €14.5 billion bond payment on March 20 and the first, €110 billion EU bailout package, passed in early 2010, has run out. EU leaders agreed in principle to the second, €130 billion aid package late last year, but linked its final passage to several austerity conditions, including an agreement with the private sector on debt relief worth €100 billion.
Greek leaders, however, are under domestic pressure as well, particularly with general elections likely to be held this spring. Already, the country has pushed through several biting austerity packages, and the most recent has involved 15,000 public sector firings, a 22 percent cut in the minimum wage, further tax hikes and the elimination of several provisions strengthening job security in an effort to make the labor market more competitive.
But when it came to a proposed €300 million cut in pension payments, political leaders balked. “The pensions in question are for people of low income, so the issue is important,” said Evangelos Antonaros, a conservative parliamentarian, on Greek radio. A Greek parliamentarian said that Athens had been given 15 days to find other ways to save the €300 million, but a source told the Associated Press that there had been no deadline extension.
Despite the refusal to slash pensions, Greeks are growing increasingly disgusted with the severity of the austerity measures that have been forced upon them. Fully 91 percent of respondents believe that the current government, led by Prime Minister Lucas Papademos, is taking the country in the wrong direction. The same poll, published on Wednesday in major Greek daily Kathimerini, found that support for the Socialists, which won a landslide victory in 2009 under the leadership of recently ousted Prime Minister Giorgios Papandreou, has plunged to just 8 percent.
In addition, Greek labor unions on Thursday called a two-day general strike to start on Friday in response to the new austerity measures agreed to on Wednesday night.
Yet even as Greece has hit a snag in its negotiations with the troika, its talks with private sector creditors on a debt haircut of 50 percent appear to be making progress. The debt relief will take the form of a cash payment and a bond swap, whereby private sector creditors will take a 50 percent hit on their original bond investment and will be given new Greek bonds with a longer maturity. The interest rate on those new bonds had been a substantial sticking point, but Greek state television reported on Wednesday that it would be around 3.5 percent.
The deal means that private creditors will ultimately have to forego some 70 percent of their claims. But even that, says rating agency Standard & Poor’s, wouldn’t be enough for Greece to achieve manageable debt levels. The agency, along with many others, believe that the European Central Bank will also have to renounce profits on its substantial holdings of Greek sovereign bonds, a move that could generate up to €12 billion in savings for Athens.