What next for Greece? Updated

Share:

The negotiations over a a framework for a new bailout deal for Greece reached a successful conclusion with an agreement struck between the leaders of the Eurozone’s 19 member states.

However, the road to a new bailout deal worth between €82-€86 billion is far from over and there are a number of pitfalls remaining for all sides.

The optimistic case

As part of the agreement the SYRIZA-led government in Athens has passed four pieces of legislation. These include VAT reform and broadening of the tax base, pension reform, ensuring the independence of the Hellenic statistics authority in law and passing a bill that would mean quasi-automatic spending cuts if the government misses its surplus targets.

The package of reforms passed with 229 votes, a comfortable majority in the 300-seat parliament despite 38 of SYRIZA’s own MPs voting against it. Prime Minister Alexis Tsipras gained the support of centre-right New Democracy MPs as well as the centrist To Potami party.

A vote in the German Bundestag on the deal was also comfortably cleared with 439 MPs in favour, 119 votes against and 40 abstentions.

Greece has now received €7.16 billion in bridge funding from the European Financial Stability Mechanism (EFSM) it requires to meet its commitments to debt repayments. Athens used the funds to make a €3.5 billion repayment to the European Central Bank (ECB) and has also now cleared the country’s €1.6 billion in arrears to the IMF from its missed payment on June 30.

However, talks on a full three-year bailout from the European Stability Mechanism (ESM) and the IMF must now begin in earnest as it is estimated that the government will need a further €5 billion in August.

After the legislation was passed the governing council of the ECB voted to increase the limit it is currently imposing on an emergency funding for Greek banks by a modest €900 million, allowing the banks to reopen. Although the capital controls are likely to remain in place for the time being the withdrawal limit has been increased from €60 a day to €420.

With these conditions in place, the Greek economy should be able to start getting back some vitality and talks can begin on finalising the full bailout package. Given the pace of the damage that has been done over recent months, if a bailout deal is struck it is not impossible that the pick-up in Greece could (at least initially) be quite sharp as business regain access to financing to invest and the Greek government begins to clear its domestic arrears to suppliers.

The pessimists’ case

Although the reform package was passed, it was done at the potential cost of the stability of the current governing coalition. With 38 SYRIZA MPs having refused to sign on to the government’s economic plan, Greek Prime Minister Tsipras will have to hold the rest of his fractured party together to get votes passed. That is not a comfortable place for him to be.

Yet the real worry at the moment is whether the IMF can agree on the structure of any a new bailout deal unless it involves significant debt relief for Greece. Speaking on France’s Europe1 Radio, IMF managing director Christine Lagarde said that the current plan presented by European leaders was “categorically” not viable without debt relief.

Her comments come after the IMF issued a revised Debt Sustainability Analysis for Greece. Its conclusions are stark:

The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date — and what has been proposed by the ESM. There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance…Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide.

In other words, the past few weeks have done significant damage to the Greek government’s fiscal position and the IMF cannot join in with any programme that would not put Greece’s public sector finances onto a sustainable footing. Under the current proposals the IMF forecasts that even by 2022 the public debt burden will still be 170% of GDP — significantly above the 142% of GDP it forecast in the DSA it released just two weeks ago.

That’s a problem for other Eurozone leaders who fought strongly against the idea of debt relief in the bailout negotiations. They will be worried that giving Greece these concessions will turn public opinion in their own countries against the programme altogether, or in the case of Spain empower leftist opposition in the country who have campaigned against their own austerity measures.

However, they are also keen to maintain the IMF’s role in designing and overseeing the bailout programme as it is widely felt that European institutions lack the expertise that the Fund has in these areas.

Unless a deal can be struck over debt relief, then it is difficult to see how the IMF could do this without violating its own rules on debt sustainability. And this would be a big problem for whether the deal can go ahead.

Not only would the IMF’s absence take €16 billion out of the programme but pushing through a reform plan that is unlikely to leave Greece’s finances on a sustainable footing would also be a threat to its credibility.

Muddling through?

If we’ve learned anything from recent years it’s that Europeans have become experts at kicking the proverbial can down the road. It would take a brave gambler to bet against them attempting something similar on this occasion.

Both German Chancellor Angela Merkel and her finance minister won plaudits in Germany for their tough negotiating stance and it is at least possible that they could spend some of that political capital arguing for some up-front debt relief in order to keep the IMF on board.

Already Merkel has hinted that debt relief could be discussed once Greece has completed the first review of its new bailout. That alone may not be sufficient to ensure the IMF’s support but it at least suggests some room for discussion.

Their cause should be helped by the IMF, which will not want the political embarrassment of dropping out of the deal at the last minute when it pushed back against those within the Fund who argued in 2010 that the terms of Greece’s initial bailout fell foul of its debt sustainability requirement.

Furthermore, in Greece there remains strong public support for both the present government and membership of the euro currency area. That should hopefully provide sufficient stability for the government to try to push through the difficult reforms now expected of it — a task that would be made significantly easier if its European partners were to make some concessions on debt relief.

Having reached a last minute deal to keep Greece from tumbling out of the single currency, the next few weeks demonstrate whether all of that effort was worthwhile.

Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Share:
World Economic Forum logo

Forum Stories newsletter

Bringing you weekly curated insights and analysis on the global issues that matter.