Greece in hard spot as debt payment looms and European doubts grow

Petros Giannakouris/AP - A Greek pensioner rests during a protest in Athens on July 12. Pensioners were demonstrating against the country’s austerity measures.

BERLIN — Greece’s new leaders have had only a month to confront their country’s dismal tangle of economic problems, but some in Europe think the troubled Mediterranean country is up against a hopeless task.

After months of political chaos and instability, Greece has fallen behind the requirements of a $160 billion bailout it received in March, and its ability to scrape together $3.8 billion to make an August debt payment to the European Central Bank is in question. Few officials or economists believe that Greece will be able to comply with the deadlines that are conditions for receiving more assistance. And in Germany, a key contributor to aid efforts, top officials have signaled new resolve in recent days that they will not commit more money to the cause.

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That leaves Greece in a difficult position, with an economy that some analysts say will shrink by 7 percent this year — far worse than the 4.2 percent expected just months ago when the bailout agreement was inked. Greece’s new prime minister, Antonis Samaras, has said he will hold to the terms of the bailout, but his allies have signaled doubts about whether that will happen.

“It is very difficult, almost impossible,” to make $14 billion in cuts in 2013 and 2014, the head of the Socialist party, Evangelos Venizelos, told Greece’s Vima radio Tuesday. Greek leaders would like more time to meet their financial targets, a change that would probably require Europe to put up more money to support them in the meantime.

But German officials have said they will not send any new money to Greece as long as the government does not have a track record of successfully implementing the overhauls that international lenders wrote into the bailout this year. That track record could take a year to build, the Germans say, and Greek governments have struggled for more than two years to make fundamental changes to the way their economy is run. With new signs that global growth is slowing, recovery may be even more difficult.

Progress lags

Around election season this year — which lasted from April until June because the initial May vote failed to produce a government — little work on economic overhauls took place, Greek and international officials say. After the May election, the already-slow work of privatizing state-owned assets was put on hold for a month. And a June income tax deadline that fell days before the second parliamentary election was rescheduled for July.

“The tax machine doesn’t do its best at a time of electoral uncertainty,” said George Pagoulatos, an economist who was an adviser to former prime minister Lucas Papademos.

Germany has little sympathy.

Living up to the terms of the bailout “is the necessary precondition for further cooperation,” Steffen Seibert, the spokesman for Chancellor Angela Merkel, told reporters last week.

Before the June elections, Samaras pledged to renegotiate the terms of the bailout with the international group of creditors that now keeps permanent watch over Greece’s finances. But European officials have dashed his hopes of significant changes.

Some flexibility remains, as long as it does not require the German parliament to vote for more money for Greece. Many European leaders are reluctant to cut off aid to Greece — probably casting it out of the euro zone — so soon after voters chose Samaras over a fiery anti-bailout party that would have been a clear challenge to Europe’s attempts to push an economic overhaul in their country. (The anti-bailout party came in second.)

European leaders have signaled that they would be willing to offer Greece a short-term loan or find another way to give the country slightly more time to make the August debt payment, since the international team of inspectors is unlikely to recommend freeing another installment of the bailout aid by then. And there are ways to ease Greece’s debt burden without spending more money. The interest rates Greece pays on its bailout loans could be lowered, for example.

This month, Luxembourg Prime Minister Jean-Claude Juncker, who heads euro-zone finance-minister meetings, sounded placid about Greece’s short-term prospects.

“In the month of August, we will find a solution,” he said, Reuters reported. “There will be no problems.”

Debt inspection

Formal European discussions about Greece’s longer-term path will take place only after the debt inspection team completes a report after a visit to the country next week. But German officials remain adamant that there is no political support in their country to offer much flexibility for Greece — unlike, they say, Portugal, Ireland and Spain, the other countries that have requested some form of assistance and toward which there is more goodwill.

Still, the news from Greece is not completely bleak, European officials say. Spending cuts and some labor market changes have taken place, and the government is slowly reducing its deficit. Labor is slowly becoming cheaper, making the country more competitive with its neighbors.

Even Germany may eventually be pushed toward a softened position, as it has been in the past.

“If the new government is credible, there would be a lot of pressure on Germany to accept a renegotiation of the timelines,” said Daniela Schwarzer, an expert on European Union integration at the German Institute for International and Security Affairs.

 
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