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After Second Bailout, Is Greece Still Likely to Default?

February 21, 2012 at 12:00 AM EDT
Eurozone finance ministers on Tuesday granted Greece its second bailout, a $172 billion package aimed at helping the country avoid default. Jeffrey Brown discusses the longer-term concerns of austerity measures and growth with Georgetown University's Scheherazade Rehman and Joao Vale de Almeida, the EU's ambassador to the U.S.

JEFFREY BROWN: So, what does it all mean?

We’re joined now by the European Union’s ambassador to the United States, Joao Vale de Almeida, and Scheherazade Rehman, director of the European Union Research Center and professor of international finance at George Washington University.

Welcome back to both of you.

SCHEHERAZADE REHMAN, George Washington University: Thank you.

JOAO VALE DE ALMEIDA, European Union Ambassador to the United States: Thank you.

JEFFREY BROWN: Mr. Ambassador, here we are again, a new announcement, a new deal. What does this one mean? Does it signal an end, the beginning of an end to the troubles of Greece and Europe?

JOAO VALE DE ALMEIDA: I think this is good news, in the sense that we’re trying to address a very complex and difficult situation in Greece. We’re trying to prevent contagion to other countries of the euro area.

And we’re trying to build the conditions for sustainable growth in Greece. This is what we’re talking about here, dealing with an urgent situation, an emergency situation, but looking ahead to longer-term solutions for Greece competitiveness, capacity to have sustainable growth in the future.

JEFFREY BROWN: Scheherazade Rehman, still doubts, though? We heard in that piece, we hear it all over the place still doubts about whether Greece can grow out of this, their ability to stick to the deal, et cetera.

What do you see?

SCHEHERAZADE REHMAN: I think those doubts are very, very real. And it shows up in the plan in terms of having the troika, which is the IMF, the European Central Bank, and the European Commission, representatives on the ground overseeing this new bailout package.

I think there is enormous distress and mistrust about what’s going to happen down the road and if the Greeks are going to stick with the plan. There’s an election coming in April. And we don’t know what the new government is going to do. There’s enormous pain on the ground at this point.

JEFFREY BROWN: There is a sort of extraordinary, I guess, presence now of the European Union in Greek — in Greek government, in Greek society, a very unusual situation.

JOAO VALE DE ALMEIDA: I think we’re talking about a situation in which one needs to find the right balance — balance between solidarity and responsibility.

Solidarity is what Europe is showing, together with the IMF, towards a country in difficulty. Responsibility is what Greece must show, has been showing, I must say, and needs to continue to show in order to ensure the credibility of the measures that we’re taking over there.

JEFFREY BROWN: But how worried – I mean when you say there’s still these doubts, still doubt about whether Greece will default?

SCHEHERAZADE REHMAN: I think that many, many people, including the markets, believe that Greece will default at some point.

And what this 130 billion euro bailout was, was buying time in order to have the Europeans manufacture some kind of a structured default, as opposed to a disorderly default. To some extent, some of the debt has already been written off. And more debt has been now added on to Greece.

And, at this point, I can’t see how they can pay this back, given the fact that growth at this point is nonexistent, given the austerity packages.

JEFFREY BROWN: Do you think default is still possible?

JOAO VALE DE ALMEIDA: Well, I’m not able to predict the future. And I don’t think any of us is.

We believe that this is the right track for Greece. By the way, I don’t see an alternative track for Greece. Let me just point out to one point that sometimes I listen in the debate here. For us, there is no opposition between austerity and growth. That’s the wrong choice. We need both.

We need austerity now in Greece, because there is no other alternative to restore credibility to the public finances of Greece. But we need growth. So, at the same time, what we’re doing in Greece, what the Greeks are doing is implementing structural reforms, you know, looking at the labor market, at the pension system, opening up the economy, breaking down barriers to competition.

All these are the conditions for hopefully sustainable growth in Greece. We don’t want bubbles of growth. We want to create the conditions for Greece to be able to recover its place in the world economy . . .

JEFFREY BROWN: But is there more discussion about whether there has been too much focus on austerity? I mean, there is more discussion certainly about it. I’m wondering whether, in high official circles, there is more discussion now about whether there is too much focus on austerity, making it impossible for these countries to grow.

JOAO VALE DE ALMEIDA: Again, one thing is not opposed to the other. Austerity is not opposed to growth.

And if you look at the last European Union summit in January in Brussels, it was all about growth. It was all about creating the path towards sustainable growth in Europe, and reforming our economies and reforming labor markets, pension system. All this needs to be done.

And it’s not only in Europe. All industrialized countries have these kinds of problems, I believe, including the United States.

JEFFREY BROWN: What do you think about this austerity-vs.-growth balance?

SCHEHERAZADE REHMAN: Well, I think on the topic of Greece having no option, the ambassador is absolutely right. At this stage of the game, they have no option other than to instill these packages to get — regain credibility.

But I do believe that the austerity packages being put into place again in Greece and in other countries in 2012 will definitely curtail the growth. I can’t fathom how you can do such severe austerity packages, yet say that we’re going to stimulate growth and create jobs. The only reliance on that is if foreign money comes in.

JEFFREY BROWN: So when they talk about a new firewall, which was a big part of the discussion in Brussels the last couple of days, there’s still a potential — that’s a firewall against the possibility of more countries falling into trouble?

SCHEHERAZADE REHMAN: Well, the bailout was a firewall to keep Greece solvent right now, but there is a fund, the European stabilization mechanism, which is in place for almost about a trillion dollars if you add in all the money. It’s a firewall for Italy and Spain.

Unfortunately, I don’t believe that’s enough money if Italy does have some severe problems.

JOAO VALE DE ALMEIDA: I would like to add to what Scheherazade said. She’s absolutely right.

We are talking about different kinds of firewalls. We need now to address the more global firewall. And I’m sure our leaders will be able to increase substantially what is foreseen in order to create the critical mass.

But let me give you a couple of examples of more positive ones.


JOAO VALE DE ALMEIDA: If I take the case of Latvia, one of our member states, that went through a very painful, rigorous program, in 2009, they had a contraction of the economy of 17 percent. In 2012, last year, they had a growth of 5 percent.

So, in a couple of years, they were able, through major sacrifice — I recognize that, but they were able to restore the credibility of their economy. If you look at Ireland, for instance, in the last three years, they came from negative growth to a minor, but still relevant positive growth in 2011.

JEFFREY BROWN: But, to play devil’s advocate, in your country, in Portugal, the growth is very — is way down.

JOAO VALE DE ALMEIDA: Well, Portugal has started a program last year. They’re doing whatever is needed.

JEFFREY BROWN: In Spain, the unemployment is very high, big problems.

JOAO VALE DE ALMEIDA: I’m not saying — I’m not complacent about the difficulties. And I have enormous respect for the sacrifices that the populations of these countries have to go through.

But there is no alternative to an effort now in order to create conditions for future growth. How long it will take, I cannot predict. I hope it’s sooner than later. But these are necessary steps in order to get to that level.

JEFFREY BROWN: Do you worry — I will start with you, Scheherazade — about a kind of — a cultural rift that we’re seeing, in Germany, Germans feeling like they’re — and Margaret Warner found this in her reporting for us — feeling like they’re being asked to pay too much, Greeks now feeling rather humiliated in some cases about what is being imposed on them?

SCHEHERAZADE REHMAN: Well, you know, I think there is some truth to all of this.

And the ambassador is absolutely right. There is no other alternative, other than the structural reforms that have to be put into place. The question is moving forward. And we know, the last two years, there have been some mangling off of how this was all handled.

This is not just a structural reform happening. This is a crisis happening. And there was very little crisis management. And what my biggest fear is that they still have not got the tools in place to manage the markets. It seems to me that the market is a secondary thought in — at least from the outside, looking at some of these policies and these summit measures that do come out, that the market needs to be managed in a very clear, precise way, so that the anxiety and the confusion and the confidence is rebuilt.

But none of that is taking place in a manner which I think would be much more effective.

JEFFREY BROWN: Very brief last word?

JOAO VALE DE ALMEIDA: The last few weeks were encouraging from that point of view.

And I agree with you. It’s very difficult to manage the market. Neither Europeans, nor Americans seem to be able to do that. And maybe that’s not the purpose. But if I look at the last few weeks, after we have agreed on a new treaty, after the ECB has provided very ambitious and courageous interventions in the market, what I see in the stock exchanges, what I see on sovereign debt spreads points to the right direction. I hope this trend will continue. . .

JEFFREY BROWN: All right, Ambassador Joao Vale de Almeida and Scheherazade Rehman, thank you both very much.