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.
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.
But the events of the past year also reflect problems that are deeply embedded in the structure of Europe’s economy, political institutions and financial system — and that some analysts reckon may take a decade or more to fix.
The Greek program — the largest-ever involving the IMF — was in part meant to buy time to work on underlying issues such as strengthening Europe’s banking system and supporting the weaker European economies.
But the clock ran quickly. By December, the IMF was revising downward the forecasts for the Greek economy made just a few months before. And even those estimates are proving optimistic. As of March of this year, IMF economists said Greek unemployment would peak at 15 percent. It is already above 16 percent as Greece completes its third full year of recession.
Analysts said it has been obvious from the beginning of the crisis, in late 2009, that it would take longer than planned to revive the Greek economy. Moreover, they said it was long clear that the nation probably would need to renege on some of the more than $400 billion it owed to bondholders.
“It was inevitable that this would blow up,” said Desmond Lachman, a resident fellow at the American Enterprise Institute, adding that the program gave the European banking system time to adjust to the prospect of a default. “They bought themselves a year,” he said.
Political missteps aggravated the situation, said Allessandro Leipold, chief economist at the Lisbon Council and former acting director of the IMF’s European department. For one, German Chancellor Angela Merkel’s insistence that private holders of European government bonds must shoulder losses if a country goes broke undermined confidence that European countries would stand behind each other. That in turn undermined Greece’s ability to resume borrowing on private markets, according to European and U.S. officials who have followed the Greek crisis.
German officials, concerned about political fallout at home from spending money to bail out Greece, demanded stricter terms, including deeper cuts in public spending.
A trio of IMF reports issued Friday warned that popular anger over budget cuts and unemployment could prevent European countries from taking necessary steps to resolve the continent’s debt crisis, which the agency identified as a major global threat.
“We have entered into a new phase of the crisis that I would term the political phase, where hard political decisions need to be made because the window for substantial policy action is closing,” IMF financial counselor Jose Vinals said at a news conference. “Potentially large shocks could impact on the financial system at a time when the resilience of the system is not assured.”
Faiola reported from London. Staff writer Michael Birnbaum contributed to this report from Berlin.