The Global Economy in Turbulent Times

CHAPTER 51 Greece: More Aid Needed to Save the Austerity-Fatigued¹

After much consternation and anxiety over the Greek bailout, Europe authorized its bailout fund, the European Financial Stability Facility (EFSF), in early March 2012 to raise monies for Greece’s bond-swap exchange, the next step before final approval of the second €130 billion aid package on March 9 (first lifeline of €110 billion was in May 2010). The drawdown is expected “at the latest” by March 20, the €14.5 billion bond redemption date. The long-awaited debt restructuring won’t be “voluntary,” so legal challenges can be expected. But, in practice, bondholders understand the framework and are prepared for the losses (haircuts of as much as 75 percent of their value). By the March 8 deadline, most would have participated. Progress toward wrapping up the bailout came amid signs the crisis was easing. The European Central Bank (ECB) had since pumped €1 trillion into the financial system, pushing the risk premium between Italian and German bonds to the lowest in six months.

Greek authorities now have to deliver. Their hardest tasks include cutting 150,000 public sector jobs by 2015 and tackling unpaid taxes (€60 billion yet to collect). The IMF warned the probability of a sharp slowdown has eased, but risks to world growth remain squarely to the downside.

The outlook is worsening. Unemployment in the eurozone rose to a record 10.7 percent in January, leaving nearly 17 million unemployed. Its manufacturing sector ...