World Economy

More Misery Forecast

More Misery ForecastMore Misery Forecast

Greece has a tentative rescue deal, but relief that it is not falling out of the euro is unlikely to last long: Its economy has taken a huge hit.

Months of political brinkmanship, uncertainty and bank closures have hurt companies and brought everyday business to a standstill. And new economic measures meant to secure the bailout are forecast to put the country, which emerged last year from six years of economic crisis, through more misery, NewsNow reported.

"No one is producing. No one is buying. Everyone is scared," said 59-year-old Dimitris Farmakis, who has a cloth-making firm in Athens.

Farmakis' woes are commonplace in an economy that analysts estimate will contract by about 4% this year. That's a big reverse from just six months ago, when it had emerged from one of the most savage recessions the developed world has seen in modern history. Its public finances were also healing and the country was even considering financing itself once again on international bond markets.

Greece fell back into recession in the spring amid growing uncertainty over the country's future in the euro in the wake of the election triumph of the radical left Syriza party in January. As the bailout talks dragged on, concerns became more acute and the recession deepened, evidence suggests.

Bankruptcies Increasing

Bankruptcies are on the rise: Bad loans on banks' books are expected to surge to account for 40-45% of all loans, from 35% in December, according to Moody's credit rating agency.

Money has been pulled out in droves from the country over the past months of uncertainty. Deposits hit an 11-year low in May and analysts say it will take time for investors to find the courage to plow money back into the country, even if it has a rescue deal.

The Greek government, and many experts, say the bailout deal is needed to avoid the even worse scenario of a complete collapse in Greece's banks, which would push the country out of the euro. Economists estimate that if Greece falls out of the currency union, its economy could shrink by another 10% or 20%.

The government also notes that the bailout deal will ensure the country's funding for three years and ease its debt burden. In the short-term, it is needed to help the banks reopen, a priority for the economy to start breathing again.

Trade Hampered

Imports in Greece have been hammered by limits on money transfers that the government imposed two weeks ago to prevent a bank run. Business owners are warning there could be shortages of basic goods such as food if the situation is not resolved and banks are not reopened.

Exporters are also experiencing problems as many are unable to buy raw materials from abroad, while others say they cannot pay for agricultural products.

While a rescue deal could allow Greece to ease its money controls somewhat, the country is unlikely to be able to undo them completely—the last eurozone nation to impose such controls, Cyprus, took two years to lift them fully.

€7b Loan

The European Commission is proposing to give a €7 billion ($7.7 billion) bridge loan to Greece to cover the country's financing needs in July using the European Financial Stability Mechanism, according to document from the EU executive.

The proposal, seen by Reuters, says the bridge loan would have a maximum maturity of three months and would be repaid to the EFSM from money that Greece is to get from the eurozone bailout fund, the European Stability Mechanism on the conclusion of negotiations on the next €86 billion three-year bailout.

The proposal to use the EFSM for the bridge loan is controversial because Britain and the Czech Republic are strongly opposed to it.