Rioters Are Right: Greece Should Not Pay Off Its Debts
Hundreds of thousands of Greeks are in the streets protesting an austerity plan that will cut wages while not fixing anything. If the government were working solely in Greece's best interest, it would listen.
What is being called the "mother of all strikes" has started around the nation. Today's action marks the start of a two-day general strike, which organizers and the government say is shutting down the nation. (There have been so many previous strikes that -- except for the number of people protesting -- it may be hard to notice any difference.)
The impetus for these protests is a Sunday parliamentary vote on the latest in successive rounds of tax increases and wage and pension cuts. The previous moves were supposed to shrink the nation's budget deficit and justify the European Central Bank's bailout funding. The results so far? The country's deficit this year is expected to reach 8.5 percent of GDP or $25.2 billion -- higher than the previously agreed upon $23.1 billion, which would have been 7.8 percent of GDP. That last number is still in excess of the 7.5 percent target the government had agreed to. Also, note the phrase "is expected to." In other words, "We hope it will."
Hope is pretty much all the new plan is based on -- and pretty dismal hope at that. The plan assumes the economy will only contract 2.5 percent next year as opposed to its current rate of 5.5 percent rate. The reason for this improvement is unclear, to put it kindly. As of July, Greece's official unemployment rate was 16.5 percent. Since then, it is much more likely to have increased than decreased.
In fact, a recent study found that further cuts will just make the economy contract even faster. Planned cuts and tax increases will reduce Greek household income by about 14 percent, further decreasing economic growth. At the same time, the nation's debt will be increasing. As it stands, Greece's debt interest payments are projected to increase by 77 percent between now and 2015. So these cuts would, at best, allow the nation to keep its debt load where it is.
Prime Minister George Papandreou knows this but comes up with austerity plans to pacify international donors who are the only thing nominally keeping his nation afloat. The donors have said the solution to the ever-expanding-debt issue is for lenders to take to a hit and accept less money in repayment. The technical term for this in high finance is "taking a haircut." Plans are under discussion that would extend the already agreed upon 21 percent haircut to 50 percent or more.
Unfortunately that won't do any good either. According to a study by UBS, even a 50 percent haircut would only reduce the debt by 22 percent.
Here's what the report concludes: "To achieve an actual 50% reduction in the debt, Greece would need to implement a 100% haircut, i.e. repudiate its debt totally." As in, not pay its debts. This is exactly what the Papandreou government would do if it were acting in the nation's best interests.
Unfortunately, for all those protesters that still wouldn't prevent wage and pension cuts. It would just mean that now they might actually accomplish something.
Image of June riots in Greece courtesy of WikiCommons.
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