Understanding Greece's Austerity Deal

AP News
Posted: Feb 09, 2012 1:36 PM
Understanding Greece's Austerity Deal

Greece's political leaders on Thursday agreed to steep government cutbacks and economic reforms to qualify for a euro130 billion ($170 billion) bailout from other countries in Europe and around the world.

Here are some questions and answers about the agreement:

Q: What are the main points of the deal?

Greece has agreed to a range of austerity measures designed to bring its deficit under control. They include a 22 percent cut in the monthly minimum wage to euro586 ($780), layoffs for 15,000 of civil servants and an end to dozens of job guarantee provisions.

Q: Why is this budget cutting so important?

A: Without it, the country would not be eligible for a euro130 billion ($170 billion) bailout from other countries in Europe and the International Monetary Fund. Greece needs the money ahead of a euro14.5 billion bond deadline on March 20 and strike a vital debt-relief deal with bond investors.

Q: And if Greece were to miss this March 20 bond payment, then what?

A: A Greek default would potentially spread the crisis to other eurozone countries, by making investors even more leery of lending to them. And analysts fear it could set off a chain reaction similar to the financial meltdown that occurred in the fall of 2008 and triggered the Great Recession.

Q: Didn't Greece already get a massive bailout? Why wasn't that enough?

A. Greece has been surviving since May 2010 on a euro110 billion bailout. But the terms of that bailout were harsh, requiring higher taxes and deep cuts in public spending. Those actions pushed Greece deeper into recession, and the country's failure to control spending caused its debt burden to rise.

Q: How badly is Greece doing?

Its economy shrank at an annual rate of 5 percent in the third quarter of 2011, the most recent quarter for which data are available. Earlier in the year, it was shrinking at an 8.3 percent rate_ about as fast as the U.S. economy was shrinking during the worst of the Great Recession. Thousands of shops and small businesses, vital to the Greek economy, have gone bankrupt. Unemployment stands at 20.9 per cent. And protesters have taken to the streets of Athens regularly to denounce the government and its austerity measures.

Greece is running a budget deficit of around 10 percent of its gross domestic product, the broadest measure of economic output. It has promised the EU and IMF that it will achieve a so-called primary surplus _ a budget surplus when not counting interest payments on loans _ in 2012.

Q: How harsh are the austerity measures?

A: Greece has agreed to a 20 percent cut in its government work force by 2015. A cut of that size in the U.S. would eliminate 4.4 million jobs _ half the number lost across the economy during the Great Recession. Greece will also cut the minimum wage by 22 percent. A cut of that size in the U.S. would bring the hourly minimum wage to around $5.80, roughly the level it was at in July 2008.

Q: What are the terms of the debt-relief deal Greece is negotiating?

A: Banks, hedge funds, pension funds and other private investors who own euro206 billion in Greek government bonds would exchange them for a payment of euro30 billion, plus euro70 billion in new bonds. The payment will come from the euro130 billion package from Europe and the IMF. The new bonds would have a lower average interest rate and a longer term of maturity. The combination of less principal to repay when the bonds mature and less interest to pay every year until then means Greece would spend about 70 percent less than without a deal.

Q. How will the rest of the euro130 billion bailout be used?

A. Greece will invest roughly euro40 billion in the country's banks, who would be at risk of collapse from the losses they take on Greek government bonds as part of the debt-relief deal. The remaining euro60 billion will be used for financing the country's deficit.

Q. When was the last time a country defaulted on its debt?

A. The last major country to default on its debt was Argentina in 2002. The country finally managed to negotiate a settlement on its defaulted bonds in 2005.