After a marathon 13-hour session in Brussels, ending at 5am on 21 February, eurozone finance ministers agreed a second bailout for Greece. The aim was to lighten Greece’s debt burden and prevent the country being forced to default.
Under the deal, Greece will have some €107bn of its debt written off. The main brunt of this will be borne by private creditors, who will see the value of their Greek bonds fall by 53.5% (some 70% in real terms). Old bonds will be swapped for ones with longer maturities and lower interest rates. In addition, Greece will be given further loans of more than €130bn through the EFSF on top of the €73bn already lent. The monies will be put in a special escrow account and can be used only to service the debt, not to finance general government expenditure.
In return, Greece must reduce its debt to GDP ratio from the current 160% to 120.5% by 2020. It must agree to continuing tight austerity measures and to significant supply-side reforms to reduce the size of the public sector and increase efficiency. Implementation of the measures would be overseen by an EU Task Force based in Greece.
But while governments in the EU and around the world are relieved that a deal has been finally agreed and that Greek default seems to have been averted – at least for the time being – the problems for Greece seem set to get worse. The further austerity measures will deepen the recession, now in its fifth year. Growth is not expected to return until 2014 at the earliest, by which point real GDP is expected to have shrunk by some 17% from the start of the recession. The question is whether the Greek people will stand for further cuts in income and further rises in unemployment, which had reached 20.9% in November 2011 and is still rising rapidly.
Articles
Eurozone backs Greek bailout Euronews (21/2/12)
Greece Wins Second Bailout as Europe Picks Aid Over Default Bloomberg, James G. Neuger and Jonathan Stearns (21/2/12)
Eurozone agrees second Greek bail-out Financial Times, Peter Spiegel and Alex Barker (21/2/12)
Greece secures bailout to avoid debt default Independent, Gabriele Steinhauser and Sarah DiLorenzo (21/2/12)
EU tells Greece to cut more jobs, sees 2014 growth Reuters, Gabriele Robin Emmott and Nicholas Vinocur (21/2/12)
Eurozone agrees €130bn bailout for Greece The Telegraph, Bruno Waterfield (21/2/12)
Greece averted nightmare scenario – finance minister BBC News (21/2/12)
Greece: Dangerous precedent? BBC News, Robert Peston (21/2/12)
The end of the marathon? The Economist, Charlemagne’s notebook (21/2/12)
What Analysts Think of the Greek Deal The Wall Street Journal, Alexandra Fletcher (21/2/12)
Three steps to a strong eurozone Guardian, Henning Meyer (21/2/12)
Opinion: the eurozone is just buying time Deutsche Welle, Henrik Böhme (21/2/12)
Greece must default if it wants democracy Financial Times, Wolfgang Münchau (19/2/12)
Eurozone’s Greece deal: debt and delusions at dawn Guardian. Editorial (21/2/12)
€130bn plaster leaves Greece independent in name only Guardian, Larry Elliott (22/2/12)
The Greek debt deal: Thumbs down The Economist, Buttonwood’s notebook (21/2/12)
Webcasts and podcasts
Are Greeks’ euro days numbered? Channel 4 News (21/2/12)
Wolf and Authers on Greece Financial Times, John Authers and Martin Wolf, (21/2/12)
Greece ‘unlikely to meet targets’ BBC Today Programme, Ngaire Woods, Guntram Wolff and Alistair Darling (21/2/12)
Austerity-hit Greeks scorn bailout deal Euronews (21/2/12)
Greek Bail Out Could Lead To More Violence Sky News (21/2/12)
Official Press Release
Eurogroup statement Europa Press Release (21/2/12)
Questions
- Outline the features of the bailout on offer to Greece. What is Greece expected to do in return for the bailout?
- To what extent has the deal lightened Greece’s macroeconomic problems?
- Why does granting a bailout create a moral hazard? How has the ECB/IMF/EU Commission Troika attempted to minimise the moral hazard in this case?
- Has Greece’s financial problem been essentially one of liquidity or solvency?
- What supply-side measures is Greece being required to implement? Will they have any demand-side consequences?
- From where is Greek growth likely to emanate after 2014?
- What are the downside risks of the deal?
- How likely is it that there will have to be a third bailout?
On Tuesday 29 November, the Chancellor of the Exchequer delivered his Autumn Statement. This presented the outlook for the UK economy, with forecasts supplied by the independent Office for Budget Responsibility (OBR). It also contained details of government fiscal measures to tackle various macroeconomic problems, including economic slowdown and high levels of national debt.
The outlook for the UK economy came as no surprise. Things are looking much bleaker than a few months ago. The OBR, along with other forecasters, has downgraded its predictions of the UK’s growth rate. Although it is still forecasting positive growth of 0.9% this year and 0.7% in 2012, these rates are well below those it predicted just eight months ago. In March it forecast growth rates of 1.7% for 2011 and 2.5% for 2012.
To make things worse, its growth forecasts are based on the assumptions that the eurozone crisis will be resolved with little or no effect on the UK. But even if that were so, the debt reduction plans in the eurozone are likely to drive the eurozone back into recession. This, in turn, will impact on UK exports, more than 50% of which go to eurozone countries.
The OBR forecasts that national debt will be 67% of GDP this year and will rise to 78% by 2014/15 but then start to fall. Government borrowing is forecast to be £127bn this year, falling to £120bn in 2012/13 and then more substantially each year after that to £24bn in 2016/17.
So what measures were included in the Autumn Statement? These are detailed in the articles below, but the key ones were:
• a programme of credit easing, which will underwrite up to £40bn in low-interest loans for small and medium-sized businesses.
• £5bn of public money to be invested in infrastrucuture projects and a further £5bn in the next spending round. Agreement had been reached with two groups of pension funds to invest a further £20bn of private money in infrastructure projects.
• an additional £1.2bn for capital investment in schools.
• A cap on public-sector pay increases of 1% per year for the two years after the current two-year pay freeze.
The following videos and articles give details of the forecasts and the measures and give reactions from across the political spectrum.
Webcasts
George Osborne: Key points from chancellor’s speech BBC News, Andrew Neil 29/11/11)
Autumn Statement 2011: George Osborne – my plan to ‘see Britain through The Telegraph on YouTube (29/11/11)
UK economy slows to crawl Reuters (29/11/11)
George Osborne’s autumn statement – video analysis Guardian, Larry Elliott (29/11/11)
Autumn Statement: Osborne reveals state of UK economy BBC News, Nick Robinson (29/11/11)
Autumn Statement: Why is the deficit not shrinking? BBC News, Hugh Pym (29/11/11)
Autumn Statement: Robinson, Flanders and Peston analysis BBC News, Nick Robinson, Stephanie Flanders and Robert Peston (29/11/11)
Can the UK economy be ‘re-balanced’? BBC Newsnight, Paul Mason (29/11/11)
Articles
Autumn Statement 2011: main points The Telegraph, Rachel Cooper (29/11/11)
The Autumn Statement at a glance WalesOnline, Rhodri Evans (30/11/11)
Autumn Statement Summary 2011 TaxAssist Accountants (29/11/11)
Into the storm The Economist (3/13/11)
A battalion of troubles The Economist (3/12/11)
Weapons of mass construction The Economist (3/12/11)
Mr Osborne’s unwelcome statement BBC News, Stephanie Flanders (29/11/11)
£30bn of extra cuts keep Osborne on track, just BBC News, Paul Mason (29/11/11)
Autumn Statement 2011: Commentators give their verdict The Telegraph (30/11/11)
Autumn Statement 2011: concern remains but ‘Plan A-plus’ welcomed The Telegraph, Graham Ruddick (29/11/11)
Autumn statement: George Osborne’s cutting fantasy is over Guardian, Robert Skidelsky (29/11/11)
Hoarding for the apocalypse? I really wouldn’t blame you Guardian, Zoe Williams (30/11/11)
Reports and data
Autumn Statement 2011 – documents HM Treasury (29/11/11)
Economic and fiscal outlook – November 2011 Office for Budget Responsibility (29/11/11)
Autumn statement 2011: the key data you need to understand George Osborne’s speech Guardian DataBlog (29/11/11)
How much will the autumn statement cost and how will the economy change? Guardian DataBlog (29/11/11)
Questions
- Compare the OBR’s March and November 2011 forecasts.
- What factors explain the differences in the two sets of forecasts?
- For what reasons might national debt in the future turn out to be higher or lower than that forecast by the OBR?
- What will be the impact on aggregate demand of the measures announced in the Autumn Statement?
- What will be the impact on aggregate supply of the measures announced in the Autumn Statement?
- Why may a recession impact not just on aggregate demand but also on long-term aggregate supply?
- Why may increased pessimism by both consumers and producers make it more difficult for the government to meet its macroeconomic objectives?
Private Finance Initiatives were first introduced by the Conservatives in the early 1990s and they became a popular method of funding a variety of new public projects under New Labour. These included the building of prisons, new roads, hospitals, schools etc. The idea is that a private firm funds the cost and maintenance of the public sector project, whilst the public sector makes use of it and begins repaying the cost – something like a mortgage, with contracts lasting for about 30 years. As with a mortgage, you are saddled with the payments and interest for many years to come. This is the problem now facing many NHS trusts, who are finding it too expensive to repay the annual charges to the PFI contractors for building and servicing the hospitals.
Undoubtedly, there are short term benefits – the public sector gets a brand new hospital without having to raise the capital, but in the long term, it is the public who end up repaying more than the hospital (or the PFI project) is actually worth. Data suggests that a hospital in Bromley will cost the NHS £1.2 billion, which is some 10 times more than it is worth. Analysis by the Conservatives last year suggested that the 544 projects agreed under Labour will cost every working family in the UK about £15,000. This, compared with the original building cost of £3,000, is leading to claims that the PFI projects do not represent ‘value for money.’
More and more NHS trusts are contacting Andrew Lansley to say that the cost of financing the PFI project is undermining their ‘clinical and financial stability’. More than 60 hospitals and 12 million patients could be affected if these hospitals are forced to close. Health Secretary Andrew Lansley commented that:
‘Like the economy, Labour has brought some parts of the NHS to the brink of financial collapse.’
Labour, on the other hand, argue that the PFI contracts they created were essential at the time ‘to replace the crumbling and unsafe building left behind after years of Tory neglect.’ Although the public have benefited from the development of new hospitals, schools, roads etc, the long term costs may still be to come. Once the schemes are paid off, in 2049, over £70billion will have been paid to private contractors – significantly more than the cost and value of the projects and it will be the taxpayer who foots the bill. The following articles consider this controversial issue.
Labour’s PFI debt will cost five times as much, Conservatives claim The Telegraph, Rosa Prince (27/12/10)
Rising PFI costs ‘putting hospitals at risk’ BBC News (22/9/11)
Hospitals face collapse over PFIs The Press Association (22/9/11)
NHS hospitals crippled by PFI scheme The Telegraph, Robert Winnett (21/9/11)
60 hospitals face crisis over Labour’s PFI deals Mail Online, Jason Groves (22/9/11)
Private Finance Initiative: where did all go wrong? The Telegraph (22/9/11)
PFI schemes ‘taking NHS trusts to brink of financial collapse’ Guardian, Lizzy Davies (22/9/11)
Hospitals ‘struggling with NHS mortgage repayments’ BBC News, Nick Triggle (22/9/11)
Questions
- What is a PFI?
- Briefly outline the trade-off between the short term and the long term when it comes to Private Finance Initiatives.
- What are the arguments for a PFI? What are the arguments against PFIs?
- If PFIs had not been used to finance building projects, how do you think that would have impacted the current budget deficit?
- Is the cost of financing PFIs likely to have an adverse effect on the future prosperity of the UK economy?
The World Bank and the IMF are no strangers to criticism. Both organisations have pursued controversial policies in their attempts to improve the lot of people in developing countries. Recent events at the World Bank have heightened criticism of the organisation and in the first article below Naomi Klein (author of No Logo – nologo.org) argues that the behaviour of Paul Wolfowitz is symptomatic of a wider hypocrisy in the behaviour of the World Bank around the world. In the second article George Monbiot writes a criticism of the behaviour of the IMF and its approach.
Questions
| 1. |
Use the web sites of the IMF and the World Bank to write a summary of their roles. |
| 2. |
Assess the validity of the arguments of (a) George Monbiot with respect to the IMF and (b) Naomi Klein with respect to the World Bank. |
| 3. |
Discuss possible changes in World Bank policies that would help address Naomi Klein’s criticisms. |
After a marathon 13-hour session in Brussels, ending at 5am on 21 February, eurozone finance ministers agreed a second bailout for Greece. The aim was to lighten Greece’s debt burden and prevent the country being forced to default.