Euro-austerity drive may worsen debt burdens
Forced by international lenders to cut budgets, countries such as Greece are finding their debt burdens are actually getting worse as a result
The New York Times in London
As Greece and its international lenders continue talks on reducing the Greek budget deficit, new data from the European Union underscored the potentially Sisyphean nature of such efforts.
Some of the countries that have made the most progress in closing their budget gaps, in particular Greece, have also seen their overall debt loads actually get bigger as a percentage of the economy, according to data released by Eurostat, the European Union's data agency.
A recent report from the International Monetary Fund, one of Greece's international creditors, reached a similar conclusion. That helps explain why the IMF has started adopting a less austere stance toward debtor countries, even as countries like Germany continue to take a hard fiscal line, insisting that Athens sticks to a programme of lower spending and higher taxes.
Critics of the eurozone's austerity push have argued against it as counterproductive. But the new data provide perhaps the starkest, most objective picture yet of the mounting burdens shouldered by countries such as Greece, Ireland and Portugal that have accepted bailouts, as well as Spain, which may soon need to accept its own strings-attached European aid.
The economies of all four countries have contracted sharply under the austerity regimes - Greece's by one fourth since 2009. But the size of the debts relative to economic output has soared. That raises serious questions about their ability to repay those obligations over time.
For now, though, the Greek government apparently sees little choice but to continue working out a €13.5 billion (HK$137 billion) austerity package and a raft of changes to labour laws that its international creditors have demanded before releasing the next instalment of bailout loans.
Negotiations continued this week in the Greek capital with the troika: the IMF, the European Central Bank and the European Commission.
The Greek finance minister, Yannis Stournaras, told the economic affairs committee in Parliament on Monday that the new austerity package must be approved quickly so that Greece can secure crucial rescue funding. "The cost of us not getting the tranche would be huge," he said. "People would go hungry."
Many analysts and economists, though, say the most diligent deficit reduction programmes will do little to bring down debt levels as long as economies are not growing and the interest rates that these countries pay on their debt remain stubbornly high.
Over the long term, debt experts argue that some form of debt relief is inevitable if these debt-saddled countries are to return to a path of meaningful growth.
Even the IMF, which traditionally shuns debt write-offs, has said that for Greece, most of whose debt is held by other governments and the ECB, some form of additional debt adjustment should be considered.
Rich European countries, Germany in particular, have rejected the idea.
It is a noteworthy philosophical shift for the IMF. And it suggests that the fund has learned lessons from its experience in Southeast Asia in the late 1990s, when its austere budgetary demands backfired in Indonesia, South Korea and Thailand, causing deep recessions in all three countries.