Greek default is ‘almost inevitable’

Greek Prime Minister George Papandreou’s cabinet faces a confidence vote on Tuesday, as it fights to prevent Greece from defaulting on its debts.

The Greek Government must approve a new five-year package of tough economic reforms or miss out on a 12bn euro aid package from the eurozone countries. European and IMF inspectors have flown into Athens to discuss the terms of the aid, which is the latest tranche of an 110bn euro bailout agreed in 2010, aimed at preventing Greece from defaulting on its sovereign debt.

Greece is also expected to require a second bailout worth up to 120bn euros.

The political battles are taking place against a backdrop of huge public anger in Greece over the pain of austerity measures which have already been implemented. There have been three weeks of demonstrations, which flared into violence last week.

Most economists see no alternative but some form of default for Greece. Professor Mike Wickens

If the Government survives the vote, it will then have to pass a 28bn euro package of tax hikes and spending cuts, along with accompanying laws, by 3 July – in time for an extraordinary meeting of eurozone finance ministers and a hoped-for economic rescue.

The Greek plan includes fiscal consolidation and controversial plans to sell some state-owned companies, including power firms. If it can be agreed, which is by no means certain considering domestic opposition to the strategy, the EU bailout will be secure and Greece could escape financial ruin.

‘No alternative but default’

But economist Professor Mike Wickens, a consultant to the International Monetary Fund, told Channel 4 News that regardless of the political situation, default was likely for Greece because of the size of its debts and its inability to service them. Greece owes 340bn euros, or more than 30,000 euros per head of its 11.3m population.

“Most economists see no alternative but some form of default for Greece,” he said.

“The only solution for them is to write down on the debt they owe and whether this is bankruptcy or rescheduling or whatever, they need to do this somehow.

“They probably won’t refuse to pay but will say they can’t afford to pay at certain rates. If they can do that it will give them time to generate enough tax revenue to afford to pay their debts in the longer term.”

Professor Wickens said the key problem for Greece was that its fiscal policy had not supported its “spending spree” of borrowing at cheap rates when it joined the eurozone.

Only half its population pays any tax, he said, so while the debt issue is immediately pressing for Greece, in the long term it will have to get more tax revenues or face this problem again and again.

“It’s like a household. If you borrow a lot and do not have the revenue to pay for it, you have to keep borrowing – and there’s problems,” he said.

Read more: how does Greece's bailout affect Britain? 

Can a country go bankrupt?

Professor Wickens said countries had reneged on their debts in the past, notably in Argentina, Russia and Mexico.

In some cases, this allowed for a renegotiation of the country’s debts and how they would be paid, and helped their economies in the long-term. This could be the case in Greece but if this happens, it could have huge negative repercussions across the rest of the eurozone economy.

Many fear that private banks which have lent to Greece could face huge losses. And it is up to the creditors whether Greece is allowed the time to deal with its problems or whether there is a more chaotic bankruptcy scenario.

“Nobody is bankrupt providing their creditors are willing to hold on,” said Professor Wickens.

“The UK after 1945 had an enormous level of debt. We were allowed to hold on over the next 30 years and in fact only paid off American debt we amassed during the war five or six years ago. But time is what Greece does not have.”