Greece Defies Reform

Back in May of 2010 it became clear that Greece could no longer finance her debt and her budget deficit through the markets. Since then the nations of the European Union (and the IMF) have covered the borrowing needs of Greece with new loans.

This helping hand was conditional, the Greek government agreed to a number of tough reforms that would make the biggest sovereign bailout in the modern times possible. These reforms included across the board cuts in government spending, privatizations, steep cuts in entitlements and the pensions, a freeing of the labor market, and tax increases. Every quarter the Greek government would be evaluated and (supposedly) each quarter of the bailout loan from the EU and IMF would be based on that evaluation.

Since then the Greek government has consistently failed to come even deceptively close to the financial targets and policy goals set for each quarter. Other than a few across the board cuts (and some have been unofficially reversed since then) and many increases in taxes and fees, the government in Athens has made practically no progress in reducing the size of government or deregulating the markets.

Actually, in a year that the Greek administration was expected to reduce government spending significantly, it actually managed to increase it in the first 8 months of 2011 by €4.3 billion. The budget deficit for the same period increased from €15.6 billion to €18.6 billion.

Every quarter the Greek government has managed to avoid any reforms in the right direction and the EU has looked the other way. The markets have noticed this political theater and have become increasingly doubtful about the prospect of the EU imposing discipline on the rest of the spendthrift members of the euro area as well.

This time around the lenders of Greece, the EU and  the IMF, think that they have a better chance of imposing some discipline to the Greek government. The bailout money that is due in October is specifically to cover the budgetary deficit alone since no debt refinancing is due till December. The EU and the IMF think that the threat of withholding bailout money will be more credible this time since no payments to creditors are to be delayed or canceled.

This has made the government of George Papandreou more nervous than at any other time and more willing to promise yet more radical reforms, but almost everyone still expects that in the end a 'solution' will be found.

This solution, according to the IMF and EU would mean an implementation of what has been repeatedly been agreed to, while the Papandreou government would assume it means more money for promises of change and fundamental reform.

Last year the French public, which is probably the most pro-Greek in the EU, was for the Greek bailout by a significant majority. A year later close to the 70% of the population is against it.

Greece doesn’t have a liquidity problem but a solvency one. Even if the case were otherwise, the Greek political class seems completely unable to change its tax and spend habits even if that means a great social and political catastrophe. It has consistently disappointed its backers and it has given the sovereign debt markets a painstaking education about the self-destructive tendencies of the modern European welfare state. When all this is over, the slow motion default will have come to an end.