Greek debt crisis 'far from over'

Country faces year of destiny, with doubts about survival of government and of its eurozone membership as austerity bites

In the three years that Greece has been engulfed by the drama of its debt, crises have come and gone. But the next 12 months are likely to be more critical yet with politicians and pundits predicting that 2013 will ultimately define whether Athens remains in the eurozone. For once, Greeks are in accord with the German chancellor, Angela Merkel, who, adding to the prevailing pessimism, emphasised in her new year address that the worst crisis to ravage Europe since the second world war “is far from over”.

Few doubt that the continent’s most powerful leader had Greece – the country she recently confessed to thinking more about than ever before and not “without a certain inner involvement” – in mind. The uncertainty that has enveloped the nation since the debt drama erupted beneath the Acropolis has not been alleviated by the passage of time.

After five straight years of recession, the eurozone’s weakest link moves into 2013 with an economy set to further contract, unemployment at a record 26%, one in three living on or below the poverty line, and the worst of austerity yet to come. In the runup to Christmas, even the Greek finance minister, Yannis Stournaras, felt fit to admit that despite being the recipient of €240bn in EU and IMF rescue funds – the biggest bailout in global history – Greece could still default on its massive pile of debt, a move that would result automatically in exit from the 17-nation bloc.

“We still face a possible risk of bankruptcy,” he told the FT, adding that Athens’s fate would undoubtedly be determined by the ability of the prime minister, Antonis Samaras’s fragile coalition to survive the unrest that will inevitably erupt with enforcement of cuts worth €9.2bn in the new year alone.

Much would depend on whether the debt-stricken country meets the expectations of international creditors keeping insolvency at bay. And whether Greeks have the stamina, and their government the resolve, to accept and enact painful reforms.

“We can make it [in 2013] if we stick to the programme agreed with the EU and IMF,” said Stournaras. “What we have done so far is necessary but not sufficient to achieve a permanent solution for Greece.”

Analysts speak of a year of two parts, with the German general elections in September expected to play a pivotal role. Only then, say observers, will a newly installed government in Berlin – the main bankroller of bailout funds to date – be prepared to take the potentially costly decision of endorsing an official sector writedown of Athens’s staggering €340bn debt load.

For while the fiscal adjustment made by Greece is by far the biggest of any OECD country in modern times, there is no one who believes that its debt load is anywhere near managable. “By about June everyone will be talking again about the inability of Greece to perform economically,” said Giorgos Kyrtsos, a rightwing political commentator. “If the economy is to function again and the country to remain in the eurozone it has to be absolved of at least 50% of its debt. Currently, the situation is hopeless with debt at 180% of GDP.”

On 31 January pensioners and civil servants will experience their first real wage cuts – on top of ever-growing taxes and utility prices – in more than a year.

“A lot of people, especially in the middle class, are going to find they have no salaries at all, as reductions, ranging from 15 to 20%, are applied retroactively,” said Kyrtsos, an opponent of the growth through austerity policies that lenders have placed as the price of further aid. “All the measures we have been talking about for the past six months,” he said, referring to the budget reforms the governing coalition has been forced to draft since its election in June, “will have to be implemented and that will create all kinds of side-effects. Unemployment will rise to 30. No civilised society can function like that.”

With the country so dependent on cash handouts from foreign creditors, Samaras is acutely aware that there is no room for relaxation. The government is hoping that a long-delayed €34bn package of rescue loans, disbursed in December, will finally help energise Greece’s near lifeless economy. “But,” says Aliki Mouriki, a sociologist at the National Centre for Social Research, “the money that will be thrown into the Greek economy will take a very long time to trickle down to the people. Joblessness will continue to grow, the recession will get worse, more businesses will close. The big question will be who will survive?”

With many predicting a backlash by austerity-weary Greeks, there is speculation over whether the ruling alliance will last longer than the spring. An opinion poll released by the Kapa research group this week showed 77.3% were unhappy with the coalition.

Last year’s double elections took the heat out of a population that long ago reached boiling point, pundits say.

“It delayed the expression of unrest,” said Mouriki. “But unless people see a way out of this deplorable situation there will be an explosion. Anger and despair are building up. The explosives are there.”

Many believe a clampdown on tax evasion and the perceived privileges of the rich, as well as a successful privatisation campaign and foreign direct investment will be critical to keeping chaos at bay. “In June the tourist season will begin and that will help,” added Mouriki. “But until then we will have to hold our breath.”