Aid Junkie

Greece's Inconvenient Truth

  • Why it matters

    Why it matters

    Greece’s ongoing economic and debt problems means the euro-zone country still risks going bankrupt one day, which could jeopardize stability of financial markets in Europe and beyond.

  • Facts


    • The IMF, ECB and euro-zone countries have bailed out Greece three times since 2012 to keep it afloat and avert bankruptcy of the euro zone member.
    • Greece’s debt is over 170 percent of its gross domestic product (GDP), a level the International Monetary Fund sees as unsustainable. The IMF favors a debt haircut.
    • Euro-zone countries including Germany oppose reducing Greece’s debt, because these 18 nations hold most of the Mediterranean country’s loans and they fear a debt haircut would set a bad precedent in Europe.
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main DISTORTED 45986198 Reuters – Greece man walks past graffiti Death of euros made by French street artist Goin in Athens May 2015
Greece needs more money. Source: Reuters [M]

No, it was not a breakthrough that the Greek Finance Minister Euclid Tsakalotos and his euro-zone colleagues agreed on last week,  just another step along an arduous path – one unlikely to lead the country out of crisis any time soon. However, the planned return of the “troika” – the tripartite committee of the European Union (EU), the International Monetary Fund (IMF) and the European Central Bank (ECB) supervising Greece’s efforts to overcome its financial crisis – to Athens at the end of April is a sign that an end to the second round of reviews of the Greek adjustment program is in sight.

If the negotiations succeed, Athens can expect payment of further loan installments from the third rescue package created in summer 2015 – just before the Greek finance minister has to raise €8 billion ($8.5 billion) to repay capital and interest due in July. Without a new infusion of capital that will be impossible. It would escape bankruptcy once again.

But last week’s agreement is no reason to breathe more easily, neither for the Greeks nor their creditors. The country’s situation remains precarious; it has not yet been rescued – not by a long way.

Because he is stifling the economy, Mr. Tsipras has to make additional savings or increase taxes to meet budgetary requirements. That depresses the economic climate still further – a vicious circle.

In fact, the inspection of austerity and reform measures should have been completed a year ago, but was not, for two reasons. First are the differences of opinion between Greece’s European creditors and the IMF about macroeconomic forecasts and the necessity of debt relief.  But the main cause of the delay is the governing coalition of left and right-wing populists in Athens.

For months, Prime Minister Alexis Tsipras has been delaying the structural reforms he promised back in the summer of 2015 in return for new loans. They include liberalizing the energy market, reforming pensions and making labor laws more flexible. There are also problems with the sale of state-owned companies. the government only privatized companies following huge pressure from creditors – then thwarted them at every turn. Former communist Mr. Tsipras resists privatizations for ideological reasons, but also as a political calculation: He rewards loyal party members with lucrative jobs in state-owned companies to keep his comrades happy.

The delaying tactics of Athens recall the spring of 2015: With his confrontational approach to the creditors, Mr. Tsipras took his country to the very edge of bankruptcy. Now company owners and investors are political hostages, as they were back then.

The political impasse is a particular burden for banks, as unsettled customers withdraw their savings. This silent bank run has already reduced the deposits of institutions by nearly €4 billion since the beginning of the year, bringing them down to their lowest level in 16 years. That in turn is forcing banks to call for emergency liquidity aid from the Greek Central Bank. That makes corporate loans scarce and expensive items.

Difference between GDP and public debt in Greece

So it’s no wonder that the Greek economy is in a state of paralysis. In the third quarter of 2016, the gross domestic product in an annual comparison fell by an unexpectedly high 1.1 percent. The figures for the first quarter of 2017 are expected in mid May. But it is already clear that the government will miss this year’s growth objective of 2.7 percent. Analysts of Citigroup and Barclays Bank only expect a plus of 0.5 percent.

Because he is stifling the economy, Mr. Tsipras has to make additional savings or increase taxes to meet budgetary requirements. That depresses the economic climate still further – a vicious circle.

Opinion polls show what most Greeks think of this policy. Currently the Syriza left-wing alliance led by Mr. Tsipras could expect around 11 percent of the votes – less than a third of the votes won by the party in the elections of September 2015. The conservative opposition leads the polls by 13 percentage points. It is unlikely that Mr. Tsipras will last the full legislature period until the fall of 2019.

His successor can expect a difficult time. The third aid program runs out in the summer of 2018. By then, Athens is supposed to be able to refinance itself on the financial markets. In 2019, alone, Athens needs €20.5 billion to service its debts. From today’s point of view, it’s an illusion that the country will be able to raise this sum on the markets at affordable interest rates. If its creditors don’t want Greece to go bankrupt, they will have to come up with a fourth aid program in the middle of next year. New credits will mean imposing further austerity and reform conditions. These are not good prospects for the Greeks after eight long years of recession. Their country remains in crisis after the time lost by Mr. Tsipras’ government.


Gerd Höhler is a Handelsblatt correspondent based in Athens, Greece. To contact the authors:

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