Greece Enters Selective Default With Second Bailout

Greece enters “selective default” as a result of a bond swap arrangement.

The Acropolis of Athens, Greece, April 19, 2009
The Acropolis of Athens, Greece, April 19, 2009 (John, Melanie Kotsopoulos)

The eurozone’s finance ministers early Tuesday morning approved a second bailout for Greece worth €130 billion after the highly indebted Southern European country had agreed to implement deeper austerity measures that should reduce its deficit by €3.3 billion this year.

Athens also said it had agreement with private creditors on a bond swap which allows it to write off up to 70 percent of the value of its debt obligations. This should cut Greece’s €350 billion debt burden, which is roughly 50 percent larger than the nation’s annual economic output, by some €100 billion. By 2020, the public debt should amount to just over 120 percent of gross domestic production but this assumes a successful privatization program and a growth rate that is unlikely to be achieved.

Rating agencies will consider Greece in “selective default” because of the deal. Greek bonds will therefore no longer be eligible as collateral to loans from the European Central Bank. The nation’s banks, many of which are completely dependent on ECB funding, could be stripped of their assets, necessitating further central bank intervention to prop up Greece’s financial industry.

Given Greece’s worsening economic outlook, additional budget cuts are needed to stabilize its finances. The government faced a shortfall that was equivalent to more than 10 percent of GDP in 2010 and last year.

The political leaders of a Greek interim government were under pressure from their peers in the rest of Europe to enact a comprehensive austerity package. The Dutch prime minister Mark Rutte and European Commissioner Neelie Kroes both said that they could live without Greece in the eurozone two weeks ago. German finance minister Wolfgang Schäuble lamented Greece’s broken promises in an interview last week when he characterized Greece as a “bottomless pit.”

The latest round of austerity includes a lowering of pharmaceutical prices which is supposed to achieve €1.1 billion in short-term savings.

Reforms were enacted last year to centralize and streamline pharmaceutical purchases but savings from rebates, according to a review study by the Directorate General for Economic and Financial Affairs, were well below target in the middle of last year. The use of generic medicine in government hospitals stood at 12 percent at the time despite a 50 percent target rate.

Laws were also enacted twelve months ago that permitted the incorporation of pharmacies, reduced minimum population criteria and increased operating hours though pharmacies still shut during the middle of the day.

Defense spending will be cut by an additional €300 million. Cuts worth €400 million were previously planned for 2013-2015 along with a reduction in procurement worth €830 million.

Pensions will be cut by another €300 million. Talks between the conservative and socialist members of the Greek interim government stalled last week on pension reform. Base pensions have already been frozen but it remains unclear whether all pension payments are actually made to living retirees instead of relatives of a deceased. Pensions for high-income earners have been reduced and disability pensions as a share of total pension spending are supposed to come down.

Labor market reforms are another condition of the second round of European financial support. Employers will be able to pull out of collective bargaining agreements temporarily in order to adapt to “changing economic conditions,” automatic pay increases based on seniority are scrapped and the minimum wage is cut by 22 percent.

According to Eurostat, among the three Southern European countries that have received bailouts to avert sovereign default, Greece’s monthly minimum wage of €876 is the highest compared to €565 in Portugal and €748 in Spain. Workers in these countries also enjoy a thirteenth and a fourteenth month of pay. Yet Greek workers are less productive than their Spanish counterparts although, at least before their country was engulfed in debt crisis, they outperform the Portuguese.

Numerous professions, in accountancy, health care, real estate and tourism, have yet to be opened up to competition.