Greece won't be out of the woods yet

By Aaron Smith @CNNMoney July 1, 2011: 2:43 PM ET

Eurozone finance ministers will deal with the Greece's debt crisis when they decide on the new austerity measures that plunged Athens into violent protests.

NEW YORK (CNNMoney) -- The European Union will soon decide whether Greece has engaged in enough belt-tightening to qualify for its last $17 billion tranche of bailout funding, putting the nation's debt crisis at bay for a while longer.
The bailout is a highly contentious subject in Greece. As the Greek Parliament voted in favor of the funding on June 28, thousands of protesters descended on Athens and clashed with riot police. Tear gas choked the streets as protesters and police pounded each other with clubs and firebombs.
It's also a controversial issue among the Eurozone finance ministers, who will decide on the last part of the $156 bailout package for Greece. The decision could happen as soon as Saturday, according to news reports. This is the fifth tranche of a bailout that was approved by members of the European Union last year.
Assuming they OK it, as expected, Greece will be able to keep functioning for a while longer. But it won't take care of the nation's long-term budget problems, according to Mark Blyth, an economics professor at Brown University in Providence, R.I.
"This is simply giving them more breathing space while they're kicking the can down the road," said Blyth, referring to the bailout. "They need to have enough money to cover the primary fiscal debt, keeping the lights on at the hospitals and the military bases. Once they've got that, they're able to default without shutting down the country."
Blyth believes that a Greek default is inevitable. "Ultimately, there's no way the Greeks can pay back what they've borrowed," he said.

Greek austerity: Cure or poison?

The European Union could grant Greece yet another bailout, but that would just be extending the debt crisis while increasing the nation's already ponderous debt, said Blyth.
Still, the rest of Europe does not want Greece to default, because it would rupture the bond market and undermine the European banking system so severely that the repercussions could be felt on Wall Street.
Greek bonds worth $152 billion are set to mature through 2014. The French banking association and the German Finance Ministry, as well as German banks, have offered proposals to keep the Greeks from defaulting on this debt.
These proposals offer different variations on the same theme: rolling over Greek debt. As explained by Barclays (BCS), one of the options is to roll the debt into a 30-year bond, with at least 70% backed by private sector investors.
For the Greeks, there is one part of their future that is crystal clear: more austerity. In order to qualify for the final tranche of the bailout, the Greek Parliament had to agree to a new raft of austerity measures, in addition to the ones that were imposed on the Greek people last year. This is why people were rioting in the streets of Athens.
Since 2010, the Greeks have faced a myriad of austerity measures including pension cuts, a boost to the sales tax, excise taxes on fuel, cigarettes, alcohol and luxury goods, more stringent eligibility for disability benefits, and a hike in the retirement age to 65 from as low as 61.
On Wednesday and Thursday, the Greek Parliament approved a new raft of austerity measures: reducing the pay of public workers, increasing the attrition of public jobs and ramping up taxpayer compliance.
Tax dodging, in particular, is one of the most chronic fiscal problems in Greece. Many of the protesters in Athens blame rich tax evaders for their nation's troubles. The protesters, particularly the young and unemployed, believe they're being forced to shoulder an unfair burden to get their country out of hock.

The pain of Greece's crisis

Marko Mrsnik, the lead analyst in the recent Standard & Poor's downgrade of Greece, blames the austerity measures for exacerbating the shoddy job market. The unemployment rate has soared to 16.2%, compared to 11.6% in March 2010, he said.
The contradiction of the austerity measures is that they're harming the economy even as they're keeping it afloat, according to Jurgen Odenius, a strategist for Prudential Fixed Income.
"If you do this at the time when the economy is already weak, even though it is needed, there is a risk that the economy will spiral down even further," he said.