The government officials and economists who put together a bailout for Greece in May of last year knew there was a substantial chance the program would fail but were unprepared for how fast their efforts unraveled, putting Europe’s economy again at risk, according to people involved with the talks and others who closely followed them.
The three-year, $160 billion program was admittedly ambitious, requiring Greece to make deep cuts to its social programs, slash public payrolls and sell state-owned property and businesses.
The Greek defense minister moved to take over at finance Friday and said he's now fighting "the real war." His move was part of a cabinet reshuffle that may help save the country from default. (June 17)
But a year later, the initiative has fallen so far short that the country is again running out of money.
The rescue program undermined Greece’s growth, reducing government spending and salaries by billions of dollars in a country already in deep recession. Private companies closed or fired workers faster than forecast, driving unemployment beyond what the International Monetary Fund expected. Business and consumer spending fell further than anticipated, depriving the country of tax receipts. Sales of state-owned property proceeded slower than expected, and changes in economic policy also began to lag.
The country is back at the brink, with potentially calamitous results for Europe and the United States. In recent days, Greek interest rates have again spiked amid renewed fears among investors that the country would default. The IMF and European leaders have been urgently debating how to get the country more money.
Discussions Friday appeared headed toward at least a short-term fix. Germany, Europe’s largest economy, softened its demand that private bondholders make a “substantial” contribution to resolving Greece’s troubles. German officials agreed to a program under which bondholders would be asked to extend the terms of their existing investments on a voluntary basis, thus decreasing the amount of cash Greece would need to pay off bonds that were coming due.
The announcement of a new cabinet by Prime Minister George Papandreou was also meant to clear the way for a successful vote of confidence next week in the Greek Parliament, followed by the ratification of further spending cuts and other changes required for Greece to receive about $17 billion in new emergency loans.
Left unresolved, however, is a broader renegotiation of Greece’s program that will probably entail even more loans from the IMF and Europe.
This was not the sequence of events foreseen when then-IMF managing director Dominique Strauss-Kahn and European Union Commissioner Olli Rehn announced on May 2, 2010, the approval of a plan that “will lead to a more dynamic economy that will deliver the growth, jobs and prosperity that Greece needs in the future.”
There have been signs of renewal over the past year, with Greek exports rising, labor costs falling and inflation dipping below the European average. The program met its targets during its first months, and Greek officials even pushed for deeper cuts at the federal level when it turned out local governments had overspent.