While Italy and Spain, both struggling with huge debts themselves, have been able to reassure most investors that they can weather the storm, it is looking more likely that Athens could finally default in March when massive bond payments are due. Some observers think Greece is already beyond redemption.
“In my opinion, Greece has already defaulted,” says Clemens Fuest, an economist at Oxford University and adviser to the German government. He and other economists argue that Greece is unlikely to be admitted back to the financial markets anytime soon and is being kept afloat by bailout money in order to avoid damage to the eurozone.
His Greek colleague Nikos Vettas from the Athens University of Economics disagrees. “It is still possible to escape this vicious circle if we see decisive action within the next weeks and months,” he says. "Private creditors have to agree swiftly on the haircut procedures, the EU partners to deliver the support needed, the citizens to actively support a reform agenda and the politicians to reach the minimum consensus required for such reforms."
Everything hinges on the second bailout package for Greece, worth €130 billion ($169.5 billion), that was agreed to at a European Union summit in October. Inspectors of the so-called troika – the International Monetary Fund (IMF), the European Central Bank (ECB), and the European Union – arrived in Athens today to monitor Greece's progress cutting public spending and bringing down the budget deficit, two preconditions for receiving additional bailout money.
The country is already receiving loans of €110 billion ($139.5 billion) from a first bailout set up in May 2010.
Earlier in January, Greek Prime Minister Lucas Papademos warned that “without an agreement with the troika and further funding, Greece in March faces an immediate risk of an uncontrolled default.” March 20 is the deadline for €14.5 billion ($18.4 billion) of bonds to be repaid.
But the IMF has doubts about Athens’ ability to meet the troika's requirements. Last week German newspapers quoted an internal IMF memorandum that said that Greece was lagging behind badly with necessary reforms and that the current framework of the bailout would have to be adjusted to the country’s worsening economic situation.
Greece’s economy shrank by 5.5 percent in 2011, and a further contraction is expected for the current year. Unemployment rose to 17.7 percent, and that number will rise with government plans to cut another 150,000 public sector jobs by 2015.
Athens is also struggling to persuade private creditors to forgive half of the €205 billion ($260 billion) they hold in Greek debt – a vital part of the bailout package known as a haircut. Some banks and a number of hedge funds oppose the deal, apparently speculating they could either recover the whole amount or cash Credit Default Swaps (CDS) in the case of a bankruptcy.
Talks between the Greek finance ministry and the Institute of International Finance (IIF), which represents Greece’s private creditors, collapsed last week, but are expected to resume within days. Charles Dallara, head of the IIF, told the Financial Times that an agreement was needed by the end of this week in order to avoid a Greek default.
For Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research, the risk of a Greek bankruptcy is the lesser evil compared with a further spreading of the debt crisis within the eurozone. He thinks Greece should leave the euro.
“We can only chose between a short-term risk and a long-term one,” he says. “The long-term risk is beyond imagination.”