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Pros And Cons: Bailout & Austerity or Default & Euro Exit?

 Greece’s Prime Minister Lucas Papademos made a final warning on Saturday night, just hours before the crucial voting on the new austerity bill at the Parliament. In a TV address to the nation, Papademos said Greece was just a breath away from Zero”, that the second bailout and the austerity measures secure that the country remains in the Euro. In a dramatic tone spoken in a cool banker’s voice he warned further, that the living standard of Greeks would collapse, if the members of the Parliament fail to pass the austerity bill.

There is a lots of talking about “2nd Bailout and strangulating Austerity” or “Bankruptcy and God Saves Us”.

Here are some Pros and Cons as pilled together by the staff of Associated Press

Impose deep spending cuts in exchange for the bailout.

The pros:

Greece needs the bailout to make a $19 billion bond payment due March 20. Prime Minister Lucas Papademos warned that “a disorderly default would cast our country into a catastrophic adventure.”Papademos said the plan would help lift Greece out of recession next year.In addition to the $172 billion bailout, Greece is negotiating a deal that would reduce the $270 billion in debt it owes private creditors. Under that arrangement, a combination of reduced principal and lower interest rates would save Greece about 70 per cent on debt payments.

Selling government-owned companies, exposing professionals like architects and pharmacists to more competition and imposing other reforms is designed to make the economy more efficient in the long run.Even with the austerity plan in place, the IMF estimates it will be 2020 by the time Greece can shrink its debt load to a sustainable level.

The cons:

Such austerity can be counterproductive because it can slow the economy and reduce tax revenue. The government acknowledges that the austerity plan would cause Greece’s economy to shrink 4 per cent to 5 per cent this year. Without it, the government would expect the economy to contract just 2.8 per cent.

The plan includes lowering the minimum wage by 22 per cent and laying off 15,000 government workers this year.So far, austerity has done nothing to reduce Greece’s debt burden.

Government debt as a percentage of the economy actually grew after it began imposing austerity — to nearly 160 per cent in the July-September quarter of 2011 from 139 per cent a year earlier.”

The whole plan was a losing proposition,” says Dimitri Papadimitriou, president of the Levy Economics Institute and professor at Bard College.Austerity is causing widespread hardship and inflaming social tensions. Papdimitriou worries that Greek society is “disintegrating” under the strain: “Poverty has been increasing, homeless rates have been increasing.”

So have crime and suicides.

Default and drop the euro

The pros:

Defaulting on its debt would ease the immediate strain on Greece’s finances and probably cause it to abandon the euro, the currency used by 17 countries. Dropping the euro would leave Greece with a much cheaper currency, its own drachma. That would juice Greece’s economy by making Greek products less expensive around the world. This would give Greek exporters a competitive edge.

The cons:

Exiting the euro would throw Greece’s banking system into chaos. Lenders would panic over the prospect of being repaid not in euros but in drachmas of dubious value.

Adopting a suddenly much weaker currency could also ignite Greek inflation because prices of imported goods would soar. International investors would be reluctant to lend to Greece’s government, its companies or its banks. The freeze-up in credit could cause a depression, worse than what Greece is suffering now.

Economists at UBS estimate that Greece’s economy would shrink by up to 50 per cent if it left the eurozone.

The pain would also likely spread as European banks absorbed losses on their loans to Greece.

The worst-case scenario

 A disaster akin to what followed Lehman Brothers’ collapse in September 2011. Banks grew too fearful to lend to each other. Credit froze worldwide. Some economists would like to see European governments produce a rescue package that pairs government cuts and reforms with economic aid designed to spur growth in Greece.”When you have over 20 per cent unemployment, you need to do something,” Papadimitriou says. He wants European countries to propose something like the U.S. aid plan that rescued an impoverished Europe after World War II.”You need something similar to the Marshall Plan,” Papadimitriou says.

Source: Associated Press

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  1. Bailout2(+3,4,…): Poverty and Slavery.
    Euro-exit/Drachmas: Poverty and Freedom.

  2. Greece has no viable alternative. They must default now and revert to their own currency. To continue in the Euro is madness in the extreme – the bubble has burst and we are seeing the results, poverty, homelessness, unemployment, rioting and the worst is yet to come if the measures are passed and the bailout accepted.
    What will happen when the next bailout is required and the next and the next? What measures of austerity will be dreamed up and then imposed on the Greek people?
    Why are people paying attention to what Papademos has to say? He is the puppet imposed on the Greek people by the corrupt EU project/dream – he was responsible for ‘cooking the books’ in order to allow Greece to join the Euro in the first place. He and his fellow euro architects are either naive and stupid with no elementary knowledge of finance or they are cunning and scheming and know exactly what their goal in Europe is. Name me one country currently in the Euro zone who would have surrendered their sovereignty and entered into a European fiscal union in 2002 when they entered the currency? Now countries are being forced into this as we are told there is no other alternative.
    The unelected EU bureaucrats, Barroso, Von Rompuy, Schulz, Monti, Papademos etc. are calling the shots in Europe and imposing their will on it’s people, democracy is leaving by the back door.
    In the 30s and 40s it was “Ein Volk, ein Reich, ein Führer,” We are now seeing the rise of the Euro nationalist.

    • Great idea,
      I think you are young and you have no idea about the implications going back to the drachma. All the rich greek people have deposits in euro an US-Dollars, waiting in switzerland and cyprus to come back. Houses, Land and Loans will there pretty cheap, after the default. In the meanstime, who will pay the pensions adn salaries for state employees. No way to pay the debts in Euro with drachmes, thats real slavery.
      Before the Euro, my relatives had their Francs and Demark as sintaxi in their pillows…
      Do you really what it?

  3. A Greek Default Doesn’t Need To Be Chaotic For Greece

    Papademos and Samaras are both out their creating dire images of a post apocalyptic Greek state if a default occurs. Maybe it is a good time to remember what Papademos’ job is. He wasn’t elected. He doesn’t represent the Greek people in a fashion that we are used to – running for election and winning the election. He was foisted on the Greek people by the EU – the very people he is going through the motions of negotiating with. His JOB was to get the Greeks to accept what the EU wants.

    Yes, the first step to a successful default, is securing new money for after the default. China could, and should play a key role. If there is any lender in the world (other than the Mafia) who knows that borrowers would be scared of defaulting to them, it is China. Not only should you be able to secure financing, it would be at prices far better than selling these same assets to other European entities. The Chinese desire is strong, and the EU has felt entitled. Even more important, China has the capital to spend money to improve these facilities. China can actually spend money to make sure their investments work – which means JOBS for Greeks. A deep pocketed strategic partner (not lender) with long term goals would provide not only immediate liquidity but a potential engine for GROWTH!

    Plan B

    Immediately announce a plan to all investors. For every €100 of existing debt you can accept an offer to receive €10 of new 2.5% 10 year bonds, €10 of new 3.0% 20 year bonds, and €10 of new 3.5% 30 year bonds. Accrued interest will be “PIK’d” so it will also be paid out with the same ratio of new bonds.. The bonds will have annual coupons, but the next coupon will be 12, 15, and 18 months from now respectively for the bonds in order to minimize our future payments and to ensure the payments are staggered so speculators don’t attempt to disrupt the markets ahead of a large coupon payment. For individual investors who hold less than €250,000 of Greek bonds that were bought prior to May 2010, the amount of new bonds will be tripled, so that only a 10% write-down of principal occurs for those individuals. This will apply to all unsecured lenders. Including the ECB.

    As of March 10th Greece will stop paying interest and principal on any non exchanged debt. Period. Full stop. Sue us. The key point is, that bondholders can rant and rave about the proposed deal, but they have few rights. There is no chapter 11 for Greece. They don’t have any rights.
    Many of the austerity changes will still need to be implemented. But if this plan works, Greece will have cut their old debt by 70% (real principal reduction and not just NPV reduction). Greece will have had emergency lending from the IMF on good terms and developed a strategic partnership with China (or some other rich nation). Signs of growth will be appearing in the economy.

    someone, hopefully in Greece, needs to stand up to the technocrats and demand real plans! Real analysis of what default means should be done. The problems are too big and too real for simple fear mongering to be enough to base decisions on.

  4. It’s important to understand that the Troika is trying to provoke Greece
    to leave the Euro. They know that there’s no need for a time frame to print Drachmas because Drachmas never left the banks.
    Even in any form of default there is no must to leave the Euro. Leaving the Euro can only happen voluntary or by European laws. f.i. if Greece would be very ugly against human rights.
    So the aim will be to keep a government in power that will be able to quit the Euro “legally”. That could mean to play their show again and again just to hinder the people from voting or it could also mean to give the power to the KKE because they will quit the Euro too fast.

  5. miso-miso.
    You are entitled to your opinion but please do not make assumptions about my age or my knowledge of the implications of a default. I know what childhood poverty means as I experienced it first hand at a time without or with very little state benefits.
    Numerous countries have defaulted on their debts and with the right governance have recovered and priced their way back into world markets.
    This thread started with the statement by Svend Anderson:
    Bailout2(+3,4,…): Poverty and Slavery.
    Euro-exit/Drachmas: Poverty and Freedom.
    This is the stark reality of the situation. There is no doubt in any ones mind that at some stage in the future Greece will default – do it now and get on with building a new economy and return democracy to the Greek people.