When Greece agreed to its bailout in March, everyone involved knew that its debts would not be sustainable, but at least the can would be kicked down the road for another year or two. Unsurprisingly, the road was a lot shorter than predicted.
Under current optimistic projections, Greece will not reach 120% of GDP by 2020. In order to obtain an extra two years of time, Greece will have to accept politically unpalatable reforms in exchange for debt forgiveness by the eurozone governments. From the U.K. daily, The Telegraph:
A draft version of the Troika report obtained by Spiegel magazine said EMU governments and the European Central Bank must accept their share of losses in order to bring Greece’s public debt back to 120pc of GDP by 2020, deemed the sustainable level.
Greece must carry out a further 150 reforms, some involving a drastic loss of sovereignty. Troika payments will be held frozen in a special account under creditor control.
The Troika will have power to raise taxes automatically. There must be new laws to make it easier to fire workers and adjust the minumum wage.
In exchange, Greece should be given two extra years until 2016 to meet budget targets, costing up to €38bn.
If the current Greek government attempts to push these losses of sovereignty through Parliament, it will fall.
The process may not even get that far. The northern tier led by Germany is holding on dearly to the delusion that more loans will solve the problem when what is needed is more debt forgiveness. A program to loan Greece more money so that it could buy back its debt will only put a small dent in the problem.
Greece and Germany have reached a stalemate, and it is now a question of who will blink first. In my opinion, the Greeks have nothing left to lose, and Merkel has upcoming elections to think about. Somehow, some way, the Germans will cough up the cash.