Greek Finance Minister Evangelos Venizelos arrived in Brussels last Sunday night to beg for a $172 billion financial bailout having, he said, “fulfilled all the requirements for the approval of the new program.”
He got his bailout, the second for his tiny Aegean nation in less than two years. But what brutal requirements they were. And the amount of the rescue deal may yet prove insufficient.
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Anyone who wants to see the consequences of unaffordable government debt need only look to Athens. We hope the free spenders in government on this side of the Atlantic get a load of what’s happening in the nation that gave the world Socrates, Homer and Alexander the Great.
YET TO HIT BOTTOM
Tear gas in the air is just the beginning. The worst is yet to come.
Government payrolls are being slashed, and an economy dependent on public spending is in the fifth year of a recession with no end in sight. Unemployment stands at more than 20 percent. Wages, already down, must continue falling for the economy to be competitive again. Economic output and everyday living standards are bound to keep sinking. The health care system is being starved for cash. The only bright spot is the possibility that once Greece stabilizes, its exports, tourism, shipping and foreign investment will pick up again.
To qualify for the European rescue package approved early Tuesday, Greek lawmakers agreed to cut 22 percent from the minimum wage and 12 percent from many public pensions. A few days earlier, under pressure, the lawmakers slashed annual public spending by an additional 325 million euros. That took a further chunk out of a defense budget that had been a source of national pride.
Greeks also learned the hard way that no one trusts a deadbeat nation. Greece tried to mask its excessive debt, notably by paying Goldman Sachs $300 million for the financial derivatives version of a fig leaf.
Last week, Europeans funding the bailout demanded conditions that ensure Greece will follow through on its painful austerity measures. Part of the new funding will be held in a separate escrow account earmarked for debt repayment. Greece will be obliged to use the money for interest and principal, rather than diverting it to defense, pensions, payroll or anything else.
That’s a big concession for a sovereign nation. But Greek leaders realize that defaulting on their debt and leaving the euro currency union would bring even greater pain.
The lesson of Greece isn’t so much that an irresponsible government can borrow and spend its way into an economic calamity. We knew that. What’s instructive, for Washington and state capitals as well, is how swiftly the fall can come.
When they joined the eurozone in 2001, the Greeks were able to borrow at much lower interest rates than before, because financiers assumed — correctly as it turned out — that more creditworthy European nations would back the bonds against default. For a time, Greece grew rapidly. Its public-sector work force ballooned. Wages soared.
NO CHOICES LEFT BUT HARSH ONES
Instead of scaling back when it could have reduced its debt load without dismantling its public sector, Greece kept borrowing right up to the point when the financial world finally recognized that it couldn’t repay the money. It faced a March 20 deadline for refinancing a big chunk of debt, and with it a choice between bankruptcy and a bailout on its lenders’ terms.
No politician wants to slash pensions, health care and defense, as Greece has done. But the day of reckoning kept getting postponed, and the debt kept growing. The endgame arrived in a rush, when the only available options big enough to make a difference were harsh ones.
In Ernest Hemingway’s “The Sun Also Rises,” one of the main characters is asked how he went bankrupt. “Two ways,” he responds. “Gradually and then suddenly.”
The same goes for cities, states and nations.
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