Greece’s GDP fell 2% in 2009. Experts now forecast a 4% fall this year. The government plans higher taxes, lower spending, and a 10% cut in public sector pay. But it still expects the budget deficit to rise from 12.7% to 12.9% of GDP, well above the 3% EU target.
Some form of intervention thus became inevitable last week, as Greece’s borrowing costs rose to 7.5%, with traders worrying that it might have to default on its debt. But Greece’s loan has come at a price, with Germany insisting on a 5% interest rate for the Eurozone loan, much higher than its own borrowing cost of 3.2%.
The aid package should mean that Greece’s immediate problems are solved. But the underlying question still remains unresolved. Is the Eurozone going to become a political union, where wealthier countries such as Germany finance poorer countries? This seems unlikely. And if not, what will happen if a large Eurozone member, such as Spain (GDP $1.35trn), finds itself in the same position as Greece (GDP $0.35trn)?
Chemical company CFOs will need to keep a very close eye on developments in coming months.