EU bailout saves Greece for now, but can it survive the terms?

The massive new bailout approved for Greece early Tuesday should rescue it from immediate bankruptcy. But can the country survive being saved?

No matter how you cut it — and plenty is being cut — Greece is still only at the beginning of a long-term retrenchment and reform program that will inflict yet more pain on its people, who have already seen their living standards plummet.

The question, analysts say, is whether the country can come out the other side of the process with its democracy, economy and society all intact.

From almost unprecedented infringement on national sovereignty to a radical overhaul of the economy, the $170-billion bailout program approved by Eurozone finance ministers, the second such package for Greece in less than two years, will leave little of Greek life untouched. Yet even backers of the plan can’t guarantee that it’ll succeed in the face of fearsome market, political and popular pressures.

“There are downside risks, this is clear. It’s not an easy program,” said Christine Lagarde, the head of the International Monetary Fund. She was one of the bleary-eyed negotiators who emerged from 13 hours of talks in Brussels to announce the new rescue package.


“Even with this agreement, most of Greece’s problems lie ahead of it, not behind,” said Sony Kapoor, head of the London-based Re-Define think tank. “The Greek program remains fragile and vulnerable.”

In exchange for the billions of dollars in emergency loans, plus forgiveness of more than $100 billion in debt owed to private bondholders, Athens has committed itself to years of brutal public spending cuts that will slash wages and pensions and push tens of thousands of people out of work.

It has also pledged to take such measures as privatizing state assets, liberalizing the labor market and modernizing its tax-collection system, all of which would, in theory at least, make Greece more productive and competitive.

But the package put together by Greece’s Eurozone partners, led by fiscal disciplinarian Germany, remains focused on ever-greater austerity as a means of reducing government debt and deficit, with virtually nothing to encourage economic growth in the near term.

Many Greek citizens and analysts believe the country is being condemned to a slow and excruciating death as the economy keeps shrinking and the mountain of debt becomes correspondingly larger. Greece is being subjected to shock therapy, they say, only without the therapy.

That helps explain why there was little jubilation in Athens over the eleventh-hour deal to save it from default, even though pugnacious Finance Minister Evangelos Venizelos tried to sell it to his fellow Greeks as a “new opportunity” to reinvent their country.

It’s doubtful that many of his austerity-fatigued compatriots will believe him, and unclear how much more pain Greek society will be able to take before it unravels completely.

Protests are now commonplace, and sometimes dissolve into violent riots and choking clouds of tear gas. Homelessness, hunger and suicide rates have climbed as the country lurches into its fifth year of recession. Despair is endemic.

“I am profoundly aware of the heavy burden that Greek people are having to bear,” said Jose Manuel Barroso, the head of the European Union’s executive body. But “there is no alternative to fiscal consolidation and to structural reform in Greece if Greece wants to regain competitiveness so that it can generate again growth and jobs.... The best way of showing our solidarity to Greece is to speak the truth.”

Yet only hours earlier, a leaked confidential report exposed Eurozone officials’ misgivings over their recipe of piled-on austerity. A confidential analysis prepared for bailout negotiators conceded that there was “a fundamental tension between the program objectives of reducing debt and improving competitiveness,” which would weaken the economy further while pushing Greece’s debt ratio higher in the near term.

European finance officials had scrambled Monday night to find other ways to bring down Athens’ debt load, eventually strong-arming private creditors to take a 53.5% loss on their holdings of Greek debt and persuading the European Central Bank to forgo profits on its purchases of Greek bonds.

The confidential analysis also warned that public anger and bureaucratic resistance could hamper the Greek government in following through on its pledges to reform, as already happened with the first bailout Greece received in May 2010. Few analysts believe Athens is in much better position today.

Barroso said this time would be different because “people learn from their mistakes.”

To prevent a repeat, European officials have imposed controls on Greece that critics warn stifle democracy in the nation whose ancestors invented it.

Officials from the EU, the IMF and the European Central Bank are to be permanently stationed in Athens to track the Greek government’s progress on reform and ensure that it prioritizes repaying debt over virtually all other expenditures.

The heads of Greece’s main political parties were forced by fellow Eurozone leaders to guarantee, in writing, that they would abide by the bailout package’s terms no matter the outcome of a general election expected in April. Even more extraordinary, the German finance minister suggested that Greece postpone the election.

In effect, Greece is now being treated as little more than a delinquent child, subjected to humiliating intrusions on its sovereignty that other European countries such as France or Germany would never accept for themselves.

Some analysts see a concerted campaign by Eurozone countries, those using the euro currency, to isolate Greece as much as possible in preparation for an eventual default and exit from the euro. By turning it into as much of an outlier as possible, Eurozone officials could then depict Greece as a special case with no implications of contagion for other financially distressed nations such as Spain and Italy.

But Simon Tilford, chief economist at the Center for European Reform in London, warned that the disdain some countries are showing for Greece’s democratic and civil institutions is dangerous.

“We’re at a very critical juncture, not just for the Eurozone but for the EU…. People are suggesting that Greece is a uniquely ungovernable country, uniquely untrustworthy,” Tilford said. “Whichever government is in charge of Greece over the next year or 18 months will be put in an impossible position.”