"I do not think the plan will work," says Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace. Dadush says Greece needs even more debt relief.
But a responsible budget and sound economic policies are supposed to convince investors that the country will be able to pay its debts, and thus should be able to borrow at affordable rates.
In recent weeks, other countries in the European Union have made progress doing just that. In the final months of last year, countries such as Italy and Spain watched helplessly as yields on their debt spiraled ever higher. Governments fell in Rome and Madrid.
The new governments moved swiftly to cut spending. The result has been an easier time raising money in the bond markets and much lower rates. On Nov. 25, the interest rate on Italy's two-year bonds was 7.40 percent. On Friday, it was 2.96 percent, the lowest since June 2010.
Much of the improvement, though, is credited to the European Central Bank, which announced a program in December designed to help stabilize shaky banks in the eurozone. The ECB said it would loan the banks unlimited amounts of money at 1 percent interest and for three years instead of the normal one. The banks responded by borrowing €489 billion ($632.6 billion). They've used at least some of that money to buy government bonds — extra demand that has helped bring down governments' borrowing costs.
But Greece's problems are so severe it has remained locked out of the bond market.
Greece's outstanding government debt is about €350 billion, an amount equal to more than 160 percent of its annual economic output. The budget reforms and debt-relief deals aim to get that figure down to 120 percent by 2020. The United States has a debt-to-gross domestic product ratio of 100 percent. But because it is seen by investors as one of the safest countries to lend to, its borrowing costs have stayed low.
For Greece, the target of 120 percent is still a relatively high figure. According to the IMF, it is at the limit of what is manageable. And the figure assumes that Greece's economy will meet expectations for economic growth — no sure thing after years of ever deeper recession.
Also in question is whether Greek voters, who will choose a new government in an election tentatively set for April, will put up with eight more years of austerity.
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AP Economics Writer Paul Wiseman in Washington contributed to this report.
Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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Jane of NY 10:50AM February 09, 2012