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How much more can Greece take?

The euro has made strong gains this past week as investors react to reports that Greece has agreed on a debt reduction plan. But can it take more spending cuts?


The euro has enjoyed an optimistic week. In particular, reports that the coalition in Greece has agreed a debt reduction plan with its creditors following eight long months of negotiations have boosted sentiment.

From here on, Greece’s creditors will accept a 70.0% loss in the value of their existing government bonds, while receiving just 4.0% interest on the new ones. (This is a little like going into a negotiating room and not only coming out with no gains, but losing your trousers and shirt in addition. It is astonishing bondholders accepted these terms, and must reflect incredible pressure from the EU.)

Of course, this is but one side of the coin. In return, Greece must implement excruciating spending cuts in addition to those already put in place since 2007, when the country fell into an almighty recession from which it still shows no sign of recovering. These include a 30.0% reduction in the minimum age, slashing €300m from public pensions, and selling public assets including Hellenic Petroleum.

For politicians such as prime minister Lucas Papademos, it must take an astonishing amount of self-control to accept these terms, knowing this is the same policy that has all but obliterated Greek civil society in the past half decade. (Indeed, these latest cuts have prompted the most widespread protests yet among labour unions.)

Perhaps the reason Papademos is accepting these cuts is because the alternative is defaulting? No one seems to know the cost for certain, but estimates indicate that going bankrupt could cost Greece even more. This at least is the argument the Greek government is selling to its people.

For me at least meanwhile, the most painful part of watching this happen to Greece is knowing that the terms being imposed are for the satisfaction of its EU paymasters.

Politicians such as German chancellor Angela Merkel seem so opposed to a transfer union in Europe (which is one method by which Europe might escape its present crisis, and that evident in mechanisms such as the EFSF rescue fund) that they lend money as an alternative, but at such immense cost Greece stands no chance of getting back on its feet.

Is this the result of self-interest? A weak euro is after all an incredible boon to the Germans, since it enables them to export goods at a much lower cost than the deutschmark.

Is Mrs. Merkel sincere? UK Chancellor George Osborne after all has enjoyed great success using spending cuts to restore market confidence in Britain, and so it could work in Greece.

Is it perhaps frustration? Last month for instance, German Economy Minister Philipp Roesler requested Greece give up economic sovereignty, so angered is he by the glacial pace of progress in Athens and the repeated going back on agreements.

Or is it perhaps populism last of all? German politicians after all risk losing their positions if they are seen to be lending too freely to Greece.

Of these possibilities, I cannot say why such terms are being imposed.

In any case, the deal pulls Greece back from the brink of default for the present, in spite of the cost. This has aided the euro.

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Peter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.

Copyright: Peter Lavelle, Pure FX
Category: Expats
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