Greece’s economic restructuring has slipped behind schedule, renewing fears that the country will default on its loans and triggering a new round of bailout talks for the European nation.
European and International Monetary Fund officials have conceded in recent days that Greece needs help beyond the roughly $150 billion in emergency loans it received last year — evidence of how difficult it is proving to restructure several weak economies in Europe and to reassure world markets that the euro currency zone has put its crisis to rest.
Saddled with high levels of government debt and crippled financial systems, a whole tier of European countries is struggling to right their finances and overhaul their economies amid a sometimes wrenching sense of social change.
Ireland and Portugal have required international bailouts along with Greece in the past year, yet it remains uncertain whether they can restore economic growth and renew confidence in their governments’ ability to pay bills. That, in turn, has cast a broader pall over Europe, with uncertainty over possible losses at European banks and pension funds with holdings in those countries, and persistent talk that the 17-nation euro currency union may crack apart.
The latest blow came Monday when the credit rating agency Standard & Poor’s again downgraded Greece’s bonds. The agency said the slower than expected progress on restructuring made it more likely private bondholders will face losses — an event that could undermine confidence throughout the euro zone and force struggling nations like Spain, Italy and Belgium to face higher borrowing costs.
The Moody’s rating agency also warned of a possible downgrade.
Greece’s tax receipts have fallen below government forecasts, budget cuts have not achieved the expected savings and the government missed its deficit target last year. The IMF recently noted that there remains a “gap” in the country’s budget-cutting plans that is equivalent to about 8 percent of its annual economic output, a sizable sum to make up in the midst of already severe retrenchment and an ongoing recession.
Though much has been done to cut the country’s annual deficits and make its economy more competitive, “the program remains at a crossroads,” the IMF said in a recent review of the Greek bailout. “The authorities need to achieve a shift from stabilization of the fiscal and financial sectors, to a full set of structural reforms that set the stage for higher growth and strong job expansion.”
It may “prove difficult to convince markets to reengage” until the economy starts growing again, IMF officials concluded.
With Greece’s credit rating now among the lowest in Europe, the interest rates demanded by investors in Greek bonds have climbed to record levels on the secondary market — above 15 percent for the country’s 10-year note.
That is not of immediate concern to the country: the five-year emergency loans granted by the IMF and the European Union are enough to keep Greece solvent for now. But the bailout program envisions Greece returning to world bond markets to raise money on its own as early as next year — a goal that now appears unlikely.
Greek Finance Minister George Papaconstantinou said in a statement released in Athens that the latest rating downgrade was “not justified,” coming just weeks after a previous downgrade and in the absence of “new negative developments.”
European and IMF officials are in talks about possibly giving Greece more time to repay its bailout loans, lowering the country’s annual debt payments and lengthening the amount of time before it needs to try to borrow on its own.
But the very fact such discussions are being held is enough to cast doubt on the entire bailout program, S&P analysts concluded. If European nations like Germany agree to accept slower repayment, they may well ask private bondholders to agree to similar terms — effectively reducing the value of their investments, S&P wrote.
The bailout programs in Greece, Ireland and Portugal have all been premised on full repayment of bonds held by private investors — a principle European officials have insisted was important to maintain the overall credibility of the euro zone.