ANALYSIS: Last minute Greek deal in sight, but is new bailout enough?

By Alvise Armellini Feb 9, 2012, 15:39 GMT

Brussels - Thursday's last-minute Greek deal on a new round of tough austerity measures was expected to pave the way for a new bailout package that Athens desperately needs to remain afloat.

But analysts have been wondering for weeks - if not months - whether the strategy of the country's international lenders, the European Union and the International Monetary Fund (IMF), amounts to throwing good money after bad.

Greece has been in a recession for five years, while its public debt has ballooned from 113 per cent of gross domestic product (GDP) at the end of 2008 to 159 per cent in the third quarter of last year, according to latest figures from the EU statistical agency Eurostat.

Such debt figures have kept getting worse, in spite of the continuing rounds of austerity measures that have been passed in Athens since authorities owned up to a massive hole in the government's accounts, in late 2009.

The new EU-IMF rescue package - which comes on top of the 110 billion euros (146 billion dollars) that were granted in 2010 and were meant to shield Greece until 2013 - consists of 130 billion euros in aid and guarantees, as well as a 100-billion-euro debt write-off.

Additional debt-relief is rumoured to be forthcoming from the European Central Bank, in order to make up for worsening economic conditions that are pulling Greece away from the stated EU-IMF goal of bringing its debt-to-GDP ratio down to 120 per cent by 2020.

In return, lenders are demanding structural reforms to lift the Greek economy's potential, and a continued policy of austerity. That, in turn, is likely to depress output even further, at least in the short term, making it even more difficult to meet deficit-cutting targets.

'We're now looking at a scenario in which Greece is forced into killing levels of austerity to pay its foreign creditors, with no real light at the end of the tunnel,' US economist Paul Krugman wrote on his New York Times blog this week.

'This is just not going to work,' he concluded.

Greek newspaper Ekathimerini reported that Greek government revenues fell 7 per cent in January on a yearly basis, against a targeted 8.9 per cent increase, despite substantial increases in VAT rates.

'This is a damning indictment of the EU-imposed strategy. Greece is chasing its tail. The budget deficit is stuck near 8 to 9 per cent of GDP because the economic base is shrinking so fast,' Daily Telegraph commentator Ambrose Evans-Pritchard wrote on his blog.

On Thursday, he pointed to new data showing that Greek manufacturing had contracted by 15.5 per cent and industrial output by 11.3 per cent, while unemployment had jumped to 20 per cent.

'This is what a death spiral looks like,' he argued.

Capital Economics, a London-based research outfit, has been spreading doom about Greece's prospects for months, insisting that the country will eventually give up trying to meet crippling bailout conditions and will leave the eurozone.

In a briefing note, its analyst Ben May warned that Greek voters may reject the new austerity measures in general elections in April, 'perhaps prompting the new government to withdraw from the deal soon after, resulting in a more disorderly default.'

Even EU officials have started countenancing the possibility of a Greek euro exit.

On Tuesday, Neelie Kroes, a former Dutch minister and current EU commissioner for internet regulation, told the Volkskrant newspaper she did not favour such a scenario, but added that there would be no 'man overboard' situation if it did happen.

'It's always said that if you let one country get out, if it asks to get out, then the whole structure collapses. But that's simply not true,' she said.

For the moment, the consensus view within the eurozone is that giving up on Greece would still be too risky in terms of possible contagion to Spain, Italy or even France - all countries which would be far more costly to fix.

But that view might change if new governments in Madrid and Rome succeed in pulling their countries out of the danger zone by cutting down their deficits and pushing through ambitious economic reforms - precisely the kind of measures that Greece has so far been unable to deliver.