In April, the Greek debt crisis sent shock waves around the world, affecting interest rates and stock prices all the way to the U.S. Now, the European Union and the International Monetary Fund have issued a glowing report card on Greece's reform efforts, but it's clear the country is hardly out of economic danger.
"Our overall assessment is that the program has made a strong start," the European Commission, the IMF and the European Central Bank said in a statement after a review of the Greek recovery effort. "The end-June quantitative performance criteria have all been met, led by a vigorous implementation of the fiscal program, and important reforms are ahead of schedule."
But Servass Deroose, deputy director-general of economic and financial affairs for the EU, told a news conference that "despite considerable progress in a vast array of areas, key challenges remain."
Among the problems cited by the visiting delegation: Greek GDP is expected to decline by 4% this year and 2.5% in 2011. Inflation, which has been pushed up by the imposition of new value-added taxes -- the European equivalent of a national sales tax -- has risen to 4.75%.
Still Priced for a Default
"If you are a country that has to restore price competitiveness in order to improve your exports to bring down your trade deficit, this is clearly going in the wrong direction," says Elisa Parisi-Campone, an economist specializing in Greece at Roubini Global Economics, a New York-based economic consultancy.
Luigi Speranza, European economist for French Bank BNP Paribas, says the fact that the Athens government is ahead of schedule in meeting its promises to cut the deficit is a "positive sign" that demonstrates a political commitment to the reform process.
But Speranza said there was still a major risk that even if Greece meets all of its targets, at the end of the three-year austerity program the level of debt will be 150% of GDP, with interest payments soaking up more than 8% of economic activity. As a result, Speranza says, the market is still pricing in the likelihood that Greece will default on its debts in some manner.
Flirting With a Vicious Circle
Another wild card is the social costs of the austerity program, which has slashed 11% of the budget in a single year, cutting government jobs and pension payments to the elderly.
'When you cut back on government spending, you have workers laid off, they consume less, then you have fewer businesses and less tax revenue," says Parisi-Campone. "Then, in order to stick to the program, you need even harsher measures. This is the vicious circle when you cut too much too soon."
As evidence of this pain, the Greek General Confederation of Labor says it expects unemployment, already at 11.7%, to rise a further 20% in the next three months.
A nonprofit organization called Klimaka reported that the suicide rate in the country has doubled and perhaps tripled in the past year. According to the organization, most of the victims are men who no longer earn enough money to provide for their families and feel they no longer have a role to play.
Where the Money Should Go
Greece is receiving a total $145 billion in assistance from the EU and the IMF. Thursday's announcement cleared the way for Athens to receive the next scheduled aid payment of $11 billion in September.
Parisi-Campone says it was a mistake to use the entire $145 billion to pay off existing bondholders. What the country should do, she says, is use the money to rebuild the economy, starting with the shattered banking sector, which has been accorded junk status by the ratings agencies.
Clearly, Greece has plenty of work still to do.