Europe Now Doubts That Greece Can Embrace Reform

Officials from the so-called troika of foreign lenders to Greece — the European Central Bank, European Union and International Monetary Fund — have come to believe that the country has neither the ability nor the will to carry out the broad economic reforms it has promised in exchange for aid, people familiar with the talks say, and they say they are even prepared to withhold the next installment of aid in March.

Adding to the anxieties in financial markets, talks broke down Friday between the Greek government and private lenders over a plan to reduce Greece’s debt by $130 billion, a “voluntary” default that the troika has demanded before extending more aid. Those negotiations, aimed at forcing hedge funds and other private holders of Greek debt to accept large losses in order to make the country’s debt load more manageable, will resume Wednesday amid rising concerns about the consequences of failure.

The markets have taken into account a voluntary default by Greece, most experts say. But financial experts fear the possibility of an “involuntary” default if the negotiators are unable to reach an agreement. That could unleash violent market reactions that could conceivably produce another market cataclysm like the 2008 bankruptcy of Lehman Brothers and throw the world into another recession.

Fanning those fears is a growing conviction among the Greek political establishment and the country’s lenders that the old dynamic — with Greece pretending to make structural changes and its lenders pretending to save it from default — has become untenable, people close to the talks say.

As recently as November, Greece and its lenders were optimistic that the country’s newly installed prime minister, Lucas Papademos, a well-respected financial technocrat, would stabilize Greece’s soaring debt and help nurse the country back to health.

But since then, his interim government — stocked not with technocrats but with politicians gunning for national elections as soon as March — has been paralyzed. Although it passed the 2012 national budget, it has failed to put into effect most of the unpopular changes mandated by the loan agreement that the previous government made back in 2010, when the country first admitted it was broke.

“The prime minister is a fine personality — he’s educated, he’s honest, he’s the best you can get around. But no one is helping him,” said George Kirtsos, the owner of a weekly newspaper, The Athens City Press. “Those that take the decisions at a national level believe that Greece will not make it.”

There is considerable posturing in these sorts of negotiations, and the troika has threatened to withdraw aid in the past, only to approve the next loan installment. It may do so again despite its misgivings, because the alternative of an uncontrolled default is too risky. But it will do so only if negotiations with private bondholders can be completed successfully.

But, amid a stream of gloomy news from Europe, including the downgrade of the debt of France and eight other countries, the sense that default is inevitable is growing. “When you simply go over the bare figures I can’t really imagine another scenario,” said Michael Fuchs, a leading member of Chancellor Angela Merkel’s Christian Democratic Union in the German Parliament.

“Mathematics is mathematics, and one plus one has to equal two and not five,” he said, describing how, even with a significant restructuring of its debt, the Greek government’s deficit would still be too large and its economy not competitive enough to put the country back on a sound footing.

That sense can be self-reinforcing as well, making it even harder for Mr. Papademos to push through the changes Greece needs to survive the current crisis.

Greece’s dire economic condition can hardly be overstated. After two years of tax increases and wage cuts, Greek civil servants have seen their income shrink by 40 percent since 2010, and private-sector workers have suffered as well. More than $75 billion has left the country as people move their savings abroad. Some 68,000 businesses closed in 2010, and another 53,000 — out of 300,000 still active — are said to be close to bankruptcy, according to a report issued in the fall by the Greek Co-Federation of Chambers of Commerce.

Nicholas Kulish contributed reporting from Berlin, and Dimitris Bounias from Athens.

Article source: http://www.nytimes.com/2012/01/16/world/europe/europe-now-doubts-that-greece-can-embrace-reform.html?partner=rss&emc=rss