3Qs: Analyzing Greece’s latest bailout

On Monday evening, Greece agreed to a last-minute economic bailout deal – its second – which may have warded off an all-out financial calamity in Europe. While it may fix short-term problems, the deal has left economists doubting the country’s ability to fully recover and avoid default down the line. We asked Kamran Dadkhah, an associate professor of econometrics and an expert in international economics, to explain Greece’s bailout, whether it can deliver long-term and how it will impact the rest of the world.

Please explain the details of Greece’s bailout. Will Greece be able to deliver on the terms of the deal?

Greece will receive $171.9 billion from the European Union (EU), $17 billion from the International Monetary Fund and additional funds from the European Central Bank. In addition, Greece will exchange about $264 billion of its debt held by private creditors with new bonds with 53.5 percent less value. This last step may ultimately require some arm-twisting.

On the other hand, Greece has agreed to some austerity measures – another round of spending and pension cuts, plus a 22 percent reduction of the minimum wage. Given the forthcoming election in April and the unpopularity of cuts, it is possible that politicians will renege on the austerity measures – leaving the EU to set up permanent surveillance offices in Greece.

What are the long-term implications of the bailout deal for Greece?

To avoid future defaults, the Greek economy has to grow fast. The bailout can only serve as a starting point or a first push in a long haul. Austerity measures will shrink the domestic demand. This will be on top of a long recession. Therefore, economic growth must come from exports. The question is whether Greece is in a position to substantially expand its exports. This will require the economy to be competitive; hence the cut in the minimum wage.

The debt burden of Greece is expected to decrease to 120 percent of the GDP by 2020. With less debt burden, the Greek economy could be prosperous, but only if the Greek government implements the austerity measures, if corruption is curtailed and if people agree to work harder for less money.

How will the bailout continue to affect other European economies and global markets?

The Greek economy is rather small and in another age would not have had much impact on Europe or the world. What makes the issue global today is the economic interdependence of nations. Greece’s default could have a domino effect, influencing European and even American banks. Moreover, if Greece defaulted there was fear that other European countries including Spain, Italy and Ireland could go the same way. The bailout and austerity measures (if implemented) would save Greece and send a signal around the world that the crisis is controlled. It seems that the world economy is slowly rebounding. The solution of Greece’s economic problem could help the process.