Greece Acts to Prevent March Default

Sources:
BBC: Greece MPs Pass Austerity Plan Amid Violent Protests
FT: Greece Passes Vote as Violence Erupts
Spiegel: Violent Clashes as Parliament Passes Austerity Bill

On February 12, Greek lawmakers approved a series of tough austerity measures aimed at clearing the path for a second rescue package worth €130 billion. The measures are part of the conditions set forth by the European Union (EU) and the International Monetary Fund (IMF) in providing Greece with the bailout package. Greece needs the rescue package to make its next payment on its debt, which is due on March 20. Without such aid, the country will default on its debt. Such a “messy” default could endanger the Eurozone’s financial stability and even lead to dissolution.

European leaders set two conditions for Greece to receive the €130 billion aid package. First, all Greek political party leaders must agree to the austerity and reform program designed by the “troika” (a group composed of the European Commission, the European Central Bank and the IMF in charge of monitoring the economic situation in distressed countries). To satisfy the first condition, Greek leaders passed an austerity package providing for €3.3 billion ($4.35 billion) in budget cuts this year, including 15,000 layoffs in the public sector, €300 million in pension cuts, and a 20% cut to the minimum wage from €751 to €586 per month. However, for those under the age of twenty-five, the minimum wage will be cut 30%, which means living on €525 a month. The plan also states that public sector salaries will be frozen until unemployment drops from its current 20.9% to 10%, and the government will liberalize labor laws to make it easier for employers to lay off workers.

The second condition of the €130 billion aid package calls for Greece to negotiate with its private bond creditors (which currently own about €200 billion in Greek debt) to take a “haircut” (loss) of at least fifty percent of their claims. The goal of this is to ensure that the country’s debt, which currently stands at 163% of GDP, will fall to 120% by 2020. As part of the bill passed on February 12, Greece will provide a bond swap for private creditors that will cut the value of their bond holdings by about seventy percent. In a bond swap, creditors will exchange their current Greek bonds for new bonds worth seventy percent less than the exchanged bond. Thus, by enacting measures to satisfy both conditions, economists expect Greece to receive the bailout package.