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Failed Greek bailout forces more rescue talk from Europe

European leaders are again scrambling to revive Greece's faltering economy, as Athens faces another crushing round of debt payments it can't afford.

Protesters shout slogans during a demonstration against a new package of tax hikes and reforms in front of the parliament building in Athens, Greece, May 22, 2016.
Michalis Karagiannis | Reuters
Protesters shout slogans during a demonstration against a new package of tax hikes and reforms in front of the parliament building in Athens, Greece, May 22, 2016.

Less than a year after the country's third international bailout, Greek lawmakers on Sunday approved another round of painful tax hikes and spending cuts in hopes of securing more cash from its skeptical European neighbors. The infusion is needed to help Greece make good on bond payments due in July.

The measures approved over the weekend include tax hikes on consumer goods like fuel, alcohol and tobacco — to 24 percent — and a provision that will force further spending cuts if the government fails to meet budget targets.

Hundreds of demonstrators gathered outside parliament to protest the latest round of austerity measures. European finance ministers are set to meet Tuesday to review the plan and decide whether to extend Greece further debt relief.

But the measures offer little hope of reversing Greece's downward economic spiral. Less than a year after implementing a package of reforms and relief designed to revive growth, Greece's economy continues to contract.

Last July, a relief round of 86 billion euros ($96.4 billion) was intended to buy Greece's government time to implement reforms and revive growth. But less than a year later, the plan's targets were apparently far too optimistic, according to Carl Weinberg, chief economist at High Frequency Economics.

"Even if the adjustment program agreed upon last summer were implemented — it was not — economic performance is sufficiently short of the unrealistic assumptions in the program that a cash deficit is inevitable."

As Greece's economy contracts, its accumulated debt becomes even more burdensome: A contracting economy generates lower tax revenue, leaving the government with less money to pay back its debts.

In the short term, that leaves European finance officials working up another round of cash payments. Since the first relief payments in 2010, Europe has spent more than a quarter of a trillion dollars trying to keep Greece afloat.

With roughly a quarter of Greek workers out of work, those lost income-tax revenues add to the government's cash squeeze. Many of those workers rely on government pensions and other support, which have put a further strain on Greece's budget.

The measures approved Sunday include cuts to those payments by about 2 percentage points to 15 percent of GDP by 2019. That will further crimp consumer spending and create another economic headwind.

The failure of last year's plan has many observers, including officials at the International Monetary Fund, skeptical that a repeat of last year's bailout will produce any meaningful improvement in Greece's economic future without debt relief.

But bond holders and EU officials remain reluctant to lower interest payments or restructure Greece's debt.

"Greece's debt is unsustainable," said Weinberg. "If the EU governments balk again at doing this right, then Greece will be back at center stage the same time next year."