Greek bailout - a familar fate?

Blog by
17 May 2010

With French President Nicolas Sarkozy threatening to pull out of the single currency altogether last Friday, the eurozone’s bailout of Greece seems to be tinged with panic.

But this is an extreme moment, as a member of the European Union faces up to a grim reality for many developing countries.

The combined bailout plan of nearly €110 billion (over US$135 billion) was approved on 9 May after the International Monetary Fund (IMF) and the EU agreed on how the funds would be used to resolve Greece’s debt.

In 2009 that debt had reached 108 per cent of its GDP, compared to those of eurozone partners such as Portugal, at 75 per cent, and with EU member the UK at 68 per cent.

Just like developing countries that have long requested loans from the IMF because of economic woes, Greece has undergone its own consultation with the IMF. Greece duly completed a Standby Arrangement and filed a Letter of Intent, which details the policies it will implement in order to restore the balance of its import and export revenue and finalises the agreement.

However, unlike developing countries, Greece is being rescued from a self-induced crisis. There were no devastating natural disasters, no unexpected shifts in the exchange rate; Greece’s financial woes come from overspending that started with its hosting of the 2004 Olympics.

Due to its newfound credit, Greece was like a shopaholic with a new credit card. Export spending grew so wildly that the whole of the EU needed to step in and negotiate a bailout plan that would contain the problem by providing over €70 billion to foot Greece’s bill.

Part of the bailout plan will make products and services in Greece less expensive compared to other regions in the EU zone. According to Mark Weisbrot, co-director of the US-based Center for Economic and Policy Research, the goal of the bailout is to create enough unemployment so that wages and prices will fall.

Hard times ahead

No wonder millions of Greeks are in protest. Weisbrot argues that such devaluation will decrease living standards and severely affect the working class. In an effort to correct Greece’s bloated public sectors and overspending, the bailout plan will limit early retirement, cut government spending on health, reduce wages below the minimum wage, and yet provide more money to the banks among other policies.

Even many economists are against the bailout, suggesting that this devaluation will lead to deflation, an even deeper recession, and more debt. In essence, Greece is looking at a pattern afflicting many developing countries who have received IMF loans.

Lessons from the South

In 2010, El Salvador was approved for an IMF loan that would eliminate government co-payments for services and medicines at public medical facilities as a measure to reduce government spending. Although social security policies were put in place for employment services including job creation and cash transfers to the poor, IMF policies still froze wages during rising inflation.

According to the president of the Central Bank of El Salvador, ’In the current situation…fiscal targets established by the IMF make it difficult to achieve social spending targets, including infrastructure spending.’

Ethiopia’s Letter of Intent loan policies led to an increase in the number of people requiring assistance. The energy subsidy removal policy included kerosene, a main source of energy to poorer populations who have now switched to charcoal and wood increasing health problems.

There are currently over 15 countries requesting IMF loans as of 2010, and most of the negotiations have included little to no stakeholder participation outside of the ministries of finance. Although the IMF is taking steps toward reform, there is a clear need for stakeholder involvement that includes societal, environmental and economic organizations that are vital to the IMF in accomplishing its mission of poverty reduction and balanced growth.

As the recession continues, more and more countries will seek the assistance of the IMF and other international financial organisations. To reduce the impact of the recession, financial negotiations must start with inclusive stakeholder meetings.

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