So, Greece won't be defaulting on €9 billion of its debts today. A group of European countries including Germany (under protest), France, Austria, even Spain, have stumped up the first €14.5 billion of a €110 billion bailout package.
In return, the Greek government, led by Prime Minister George Papandreou, is imposing a number of budget-balancing austerity measures, including a freeze (and then cuts) in pensions, a rise in consumption taxes, and a crackdown on tax evasion, which is rife in Greece. The aim is to reduce the budget deficit, currently 13.6%, down to just 3% by 2014 – a much faster rate of reduction than any politician is proposing for the UK. And in response to that, the local trade unions have scheduled yet another general strike for Thursday, shutting down much of the country's transport system (but not the airports that are so essential for Greek tourism), and other public services.
Greece has little option but to make the cuts, however. The alternative would be to default on its debt repayments, and some people say this isn't such a bad option. After all, Russia defaulted but recovered soon enough. If Greece defaulted, though, it could kiss goodbye to any further borrowing. For years, potential investors just would not believe their money was safe. And if it could not borrow, Greece would have to balance its books and bring its deficit down to zero in less than no time. Think of the strikes and demonstrations it would have then.
There are difficult times to come even so. Debt interest is a heavy burden on the Greek economy, about 7.5% of GDP, and with all the cuts, economists are predicting a major economic downturn. If Greece had its own currency, it could grow its way out of the problem by letting its exchange rate slip, so tourists would flock in. Sadly, being a member of the Euro, that is not possible.
Lots of German commentators in particular are asking why their government is helping to bail out Greece, a country they despise for its incompetence and corruption, and feel they have nothing in common with its Mediterranean culture. The answer is that they are not bailing out Greece as much as bailing out their own banks, or at least trying to insulate them from a Greek bankruptcy. European regulators have told the banks to hold safer securities – not sub-prime mortgages, but things like sovereign debt. So they bought sovereign debt. But now more than one sovereign state looks just as dodgy as a sub-prime mortgage security. Yet again, European taxpayers are stumping up the bill for the results of the stupid regulations that their governments impose on business. It was always thus. It's just even more so these days.
