More than two years after it came clean about its addiction to debt, Greece may finally have begun its long and painful road to recovery.
Greece's political leaders struck a historic deal Thursday to make deep cuts in government jobs and spending to help save the country from a default that could shock the world financial system.
The deal is one of two critical steps Greece must take to receive a euro130 billion ($170 billion) bailout from other countries in Europe and around the globe. It was announced by Greek Prime Minister Lucas Papademos' office and came ahead of talks in Brussels between finance ministers from the 17 countries that use the euro.
In addition to the fiscal austerity mandated by the European Union, the European Central Bank and the International Monetary Fund, Greece is close to an agreement with private investors who hold nearly two-thirds of its debt to sharply reduce the country's borrowing costs.
Greece needs the bailout by March 20 so it will have enough money to redeem euro14.5 billion worth of bonds coming due. If it doesn't make that payment, it will be in default. Financial analysts fear that could set off a chain reaction similar to the financial meltdown triggered by the collapse of investment bank Lehman Brothers in the fall of 2008.
The bailout will ease the turmoil that has rocked Europe and the world financial system for more than two years, but it will not bring down the curtain on Greece's debt drama.
Greece remains in a deep recession. Unemployment is near 21 percent after the economy's third straight year of decline. Its government finances and its economy are being dragged down by costly political patronage, tax evasion and special protections for some favored trades.
Greece will be struggling to pay its debts for years, says Domenico Lombardi, senior fellow at the Brookings Institution. "The scope of the problems that have to be tackled in Greece are so huge and so entrenched," he says.
Efforts to fix those fundamental problems, at the behest of Greece's increasingly exasperated creditors — including prosperous Germany — are moving slowly, if at all. If they are not solved, Greece may find itself back at the bailout trough.
Greece is also close to a vital debt-relief deal with banks, hedge funds, pension funds and other private investors. Under the deal, the private investors would exchange euro206 billion in Greek government bonds for euro30 billion in cash, plus euro70 billion in new bonds. The cash will come from the euro130 billion package from Europe and the IMF. The new bonds will have a lower average interest rate and a longer term of maturity.
The combination of less principal to repay when the bonds mature and less interest to pay every year until then means Greece will spend about 70 percent less than it would have without a deal.
The debt held by the European Central Bank and other public institutions accounts for one third of Greece's national debt and is not part of this deal.
If Greece had defaulted, investors would have become reluctant to lend to other heavily indebted European countries for fear they would not get their money back, pushing their borrowing costs even higher than they are now.
Those other countries include Italy, which has an economy six times the size of Greece's. Most analysts say Italy is too big to bail out.
The specter of default has hung over world financial markets for more than two years. Whenever there has been progress — and, indeed, U.S. stock indexes have doubled from the lows they reached in March 2009 — Greece has always stood in the way of more.
And while the immediate danger appears to have passed, it is far from clear whether Greece has won enough debt relief to fix its finances for good.
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