Alternative(s)

Despite austerity, E.U. debt gets worse

• Article by: LANDON THOMAS Jr. and , D
       AVID JOLLY
• Updated:
       October 22, 2012 - 8:48 PM

LONDON -- As Greece and its international lenders
continue tense talks on reducing the Greek budget deficit, new data from the
European Union on Monday underscored the potentially Sisyphean nature of such
efforts.

Some of the countries that have made the most progress in closing their budget gaps -- Greece in particular -- have also had their overall debt loads 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 stick to a program 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 like 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.

"If you want to make its debt burden sustainable, there will have to be some kind of debt forgiveness and restructuring," Jorg Kramer, chief economist at Commerzbank in Frankfurt,
Germany, said of Greece.

For now, though, the Greek government apparently sees little choice but to continue with a 13.5-billion-euro austerity package and a raft of changes to labor laws that its so-called troika of international creditors have demanded before releasing the next installment of bailout loans.

Negotiations continued Monday in Athens 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."

"Do you think the Europeans are bluffing when they say, 'Take the measures to get the money?'" Stournaras said.

Many analysts and economists, though, say the most diligent deficit reduction programs 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.

"The theory that these countries will grow out of their debt problem has a strong aspirational element to it," said Lee Buchheit, a senior sovereign debt lawyer at Cleary Gottlieb Steen &
Hamilton in New York. He worked on debt reduction deals in Latin America in the
1990s and was involved in the revamping of Greece's debt earlier this year.
"There is not much doubt that this problem will require a more severe
remedy," Buchheit said.

There have been varying causes to the debt spirals. Greece and Portugal, whose ratios of debt to gross domestic product have hit new highs of 170 percent and 120 percent, respectively, can blame high interest rates and deep recessions. But for Ireland, with a debt burden of 117 percent of GDP, and Spain, with a ratio of 90 percent, a big factor is heavy borrowing they had to do to bail out their failed banks.