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Despite New Bailout, Sacrifice, Greece Still on Edge of Default

ATHENS – While many political leaders in Greece expressed satisfaction with a new bailout from international lenders – this one for $170 billion needed to pay debts, workers and pensioners – dissension and doubt remained and the ratings agency Fitch downgraded Greece to its lowest rating, just above default – and that it would fall further to a technical default once the country signs a deal with creditors to write off 74 percent of its debt.
Fitch, along with the other two major agencies, Moody’s and Standard & Poor’s, downgraded Greece last July when the notion of the debt swap was first released and warned then that making investors take losses would trigger a temporary default, although not a disorderly default that could have seen the country forced out of the Eurozone of the 17 countries using the euro as their currency.
As expected, Fitch said it was downgrading Greece to “C” from “CCC”, and would follow up with further downgrade to a “restricted default” when the bond swap is completed and would then reassess the country’s ratings when new bonds are issued as part of the debt exchange. “It would come out to a low, speculative grade rating,” Fitch analyst Paul Rawkins told Reuters on the ratings after the reassessment, noting that rating would factor in the country’s economic prospects and new debt profile.
He added that the current process of downgrades was largely procedural, following the path laid out by the agency in June. Ratings, which give an estimate of the capacity of a creditor to repay its debt, usually serve as a guide to investors. Eurozone finance ministers this week agreed to give a second bailout on top of a first from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) for $152 billion, including a bond swap to write off $132.5 billion in debt. Greece is still negotiating the so-called Private Sector Involvement (PSI) deal but warned that it would make it obligatory for those who refuse to go along, which could set off a disorderly default that could plummet the country into an even deeper crisis. The European Central Bank has also agreed to a complex plan to ensure Greek bonds can still be used as collateral in its lending operations whilst in the process of being swapped and said it would lower interest rates on loans to Greece.
The bailouts though have come with attached requirements for pay cuts, tax hikes, slashed pensions and plans to lay off 150,000 public workers, which have set off two years of protests, riots and strikes and led to the formation of a hybrid government now headed by former ECB Vice-President Lucas Papademos that is struggling to keep the country from going under.
Despite the bailouts and the austerity measures, which have created 20.9 percent unemployment and the closing of 111,000 businesses – with new reports another 180,000 may soon fold – Greece’s deficit for 2012 is expected to be 6.7 percent of Gross Domestic Product (GDP,) far higher than the 5.4 percent originally estimated. Austerity has kept Greece in five years of recession and is expected to further drive down tax revenues, creating what some analysts fear is a “death spriral,” from which the country can’t recover no matter how much money is poured into it.
While the country’s two major parties making up the government, the holdover ministers of the former ruling PASOK Socialists and their bitter rival New Democracy conservatives are uneasily tied together and supported the bailout, some of Greece’s other parties do not. New Democracy leader Antonis Samaras, who opposed the austerity and bailouts when PASOK was in power, then supported them, and now says he opposes them again, still said the deal safeguards the country, although he said he reserves the right to change his mind again if he is elected Prime Minister when elections are held, expected for the end of April. “The decision eliminates the risk of bankruptcy, secures its prospects within Europe, creates the possibility for debt to become sustainable, and opens the road for elections,” Samaras said.
Socialist leader George Papandreou, who resigned as Prime Minister on Nov. 11, 2011 in the face of riots, strikes and protests against austerity, said the deal “vindicated” the efforts of the government.  “The road now opens for the creation of all the necessary conditions for a new growth effort which the country needs so badly,” Papandreou said. He added that the deal meant “the sacrifices of the Greek people will not will not be in vain but will pay off.” Analysts, however, said that the deficit, now at 160 percent of GDP, still will hover between 120-129 percent by the year 2020.
Greek Communist Party (KKE) leader Aleka Papariga condemned the agreement as bringing the “orderly default of the country and the disorderly default of society,” adding that it was nothing more than a temporary solution for Greece. The right-wing Popular Orthodox Rally (LAOS) party, which left the unity government earlier this month, dismissed the deal as ineffective, with party leader Giorgos Karatzaferis remarking, “We have been internationally humiliated and we will not be able to return to the markets until 2020.”
Alexis Tsipras, head of the Coalition of the Radical Left (SYRIZA), said “it is clear that this agreement exclusively concerns and binds those who signed it,” adding that, “It is not signed by the Greek people. It is signed by a government acting in its name that has no legitimacy.” Fotis Kouvelis, leader of the Democratic Left, said the deal ignored the country’s growth prospects, expressing fears that new austerity measures would be demanded before long. Dora Bakoyannis, the former conservative foreign minister who heads the centrist Democratic Alliance, was one more upbeat. “Europe, though belatedly, did its duty yesterday,” she said.
(Sources: Kathimerini, Reuters, AP)

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