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