Next week could be a big week in the never-ending saga between Greece and the European Union.
The Greek government is to present a list of reforms to its European and international lenders on Monday to unlock bailout funds it desperately needs to stave off bankruptcy.
With time, and crucially money, running out, Athens needs part of the €7.2 billion, or $7.8 billion in remaining bailout funds – the last tranche of a €240-billion bailout Greece has received since 2010 – to be unlocked as soon as possible.
Prime Minister Alexis Tsipras came to power in January pledging to end austerity. But the international lenders that Greece depends on to stay afloat, led by the European Union and International Monetary Fund, have demanded his government commit to a series of reforms before they release more aid.
Mr. Tsipras is now in the process of trying to persuade his radical left Syriza party to back the reforms, even though they are likely to clash with the party’s election promises.
Once the list has been handed over, it is thought a euro-group meeting of the 19-nation euro currency zone’s finance ministers could be held as early as Tuesday to discuss whether the package is acceptable.
But what exactly is the state of the Greek finances? And what would happen if Greece was denied any more funds? We go through the key questions.
How much money does Greece owe this year?
In total, the Greek government needs to pay €19 billion between March and December, which is the equivalent of around 10 percent of the country’s GDP.
In March, Greece has had to pay at least €2.4 billion in interest and other loan repayments, including €1.5 billion to the International Monetary Fund and €0.75 billion in interest for other bilateral loans and bonds. In April and May, repayments will amount to €1.7 billion, with a repayment to the IMF of €450 million due on April 9, which currently the government would probably not be in a position to pay. In June, payments of €2.1 billion are due. In July and August, Greece needs to pay back €8.2 billion to the European Central Bank for government bonds and interest payments.
How long can the Greek government survive without additional external help?
Sources close to the Greek government have said that the government will run out of cash by April 20, according to Reuters. Some economists see April 9 as a crunch day, with a big loan repayment due to the IMF.
Experts think that the finance minister, Yanis Varoufakis, needs €4.5 billion per month to pay for running costs and to service the country’s debt. At the moment, he is facing a huge shortfall in taxes. In January and February, tax income was down €1.5 billion compared to the year before. This is the equivalent of 0.8 percent of GDP. To compensate for the loss, the government is said to have taken €2 billion out of the pension fund.
“De facto, the government has no more money anymore,” said Christoph Weil, economist at Commerzbank.
In theory, Greece should receive €7.2 billion by May from the bailout programs agreed with international lenders, the European Union, the European Central Bank and the International Monetary Fund, but only under the condition that Athens implements certain reforms.
What effect did Syriza’s victory have on the Greek economy?
After Syriza was elected, the Greece economy showed signs of weaknesses again. Ahead of its victory in January when polls already showed that Syriza was likely to win an election, the overall economic performance rate started to slow down. The country’s GDP shrank by 0.4 percent in the fourth quarter of 2014 after three quarters of consecutive growth.
Greece had looked like it was on the path to recovery. In 2014 GDP grew by 0.7 percent for the first time after six years of recession. Reforms and pressure from European partners have led to some positive effects, with competitiveness improving and exports of goods and services increasing by double digits. Tourism in Greece picked up as well. The Greek trade balance had a surplus of 1.6 percent of the overall gross domestic product in 2014, compared to minus 14 percent in 2007.
“There has never been a government that caused as much trouble in such a short period of time as this one.”
Looking ahead into 2015, indicators show that this trend is not likely to continue. A purchasing manager index for manufacturing compiled by Markit – a leading indicator on economic performance – showed a weak result of 48.4 points in February. That’s below the critical 50-points mark that indicates expansion. Furthermore, tax income is also falling short. Instead of the expected €4.5 billion in January, the government only took in €3.5 billion. In February, it received €1.5 billion less than expected. The fact that Syriza and the party’s leader, Alexis Tsipras, had promised to cut taxes has led many taxpayers to just stop paying taxes at all.
“There has never been a government that caused as much damage in such a short period of time as this one,” said Holger Schmieding, chief economist at Berenberg bank. “Within a few weeks after they were in power, the populists in Athens pushed their country to the edge of disaster,” he said.
The overall political and economic uncertainty is leading companies and investors to avoid Greece.
“If the necessary reforms and therefore aid payments are absent, then the Greek economy will shrink again in 2015,” said consultants at IHS Insight, a service company that provides information and analysis to businesses and governments.
Is there a hidden money source that Greece can tap into?
The government has already raided the country’s social security funds, with only €1.5 billion remaining, which they need to pay for outstanding pensions.
The government has also resorted to taking €300 million in E.U. subsidies intended for farmers to pay public sector wages and pensions. It is also looking to corporations in which the government has a stake for funds and has approached Greek subsidiaries of multinationals for loans.
In a blow to Athens, this week senior finance ministry officials from the euro zone rejected a Greek request to return €1.2 billion which it claimed it had paid by mistake to the European Financial Stability Facility.
The only other option Greece has is to cut salaries in the public sector and stop paying bills to other contractors. But this would erode Syriza’s popular support.
What role does the European Central Bank, the ECB, play in financing Greece?
According to the head to the ECB, Mario Draghi, the bank had already lent Greece the equivalent of 68 percent of its GDP by the start of March. The Greek government has used a large part of those funds to off-set the massive capital flight from Greece. In February Greeks removed another €7.6 billion from their bank accounts, taking the three-month decline since November to €23.8 billion.
The Greek central bank has also loaned money to Greek banks, financed by the ECB’s Emergency Liquidity Assistance loans, an emergency measure known as ELA that carries high interest and is only designed to be temporary.
This week the ECB raised the cap on ELA funds for Greek banks to above €71 billion from €69.3 billion. The ECB strategy has been to raise the cap in increments, in order to maintain the pressure on Athens to reach a deal with creditors.
Earlier this month Mr. Draghi, addressing the Italian parliament, explained why Greece was not included in the bank’s massive bond-buying program. “It doesn’t buy bonds of countries that are in a program with the IMF and the European Commission when the review of this program has not been completed,” he told lawmakers. He added that the country’s credit rating was too low and the ECB cannot buy bonds from countries above a certain percentage to avoid becoming the countries biggest creditor.
What happens if Greece runs out of money?
If the government only stops paying officials, civil servants and company’s invoices at home, the problem won’t affect the rest of Europe or any of the bailout programs.
But if Greece stops paying back interest on outstanding loans from external creditors, it will immediately be considered bankrupt internationally. Then holders of Greek bonds would have to write off the debt, with Greek banks being the worst affected. This would require a recapitalization of Greek banks, which would likely require the E.U.’s firewall, the European Stability Mechanism, or ESM, to jump in. That would leave taxpayers in other countries, particularly Germany, footing the bill. According to Hans-Werner Sinn, the head of the Munich-based IFO institute for economic research, the costs of the write downs of loans would amount to up to €86 billion.
What can Greece do to avert bankruptcy?
Greece should try to do everything in its power to fulfill the conditions to receive the outstanding €7.2 billion from the bailout programs. There are some, such as Jeroen Dijsselbloem, head of the euro group of euro zone finance ministers, who have said that they support the idea of splitting the money into tranches if Greece shows goodwill by implementing reforms. But others, such as Finland or Germany’s finance minister, Wolfgang Schäuble, are against easing the conditions of the original deal.
The Greek government is to present its European partners with a list of reforms on Monday, in the hope that this will see the euro group agree to provide it with some of these bailout funds.
Although the government is not expected to raise the retirement age, it is reported to be leaving in place an unpopular property tax.
Is Syriza going to break its election promises?
This is a question that Syriza is deeply divided about. The party is really an alliance of different groups and includes neo-Marxists, Trotzkyites, Maoists, and left-wing socialists. The problem is now that the extreme left of the party, which is anti-European and makes up one third of Syriza, wants to stick to all the election promises – even if that leads to national bankruptcy or Greece leaving the euro zone.
Mr. Tsipras is reported to be trying to persuade the party to back the list of reforms. He will first meet with the leadership of the party, before meeting with the 149 members of parliament, to try to win backing for a deal.
Do the Greek people support Syriza’s approach to the crisis?
The majority of Greeks still back their government and its handling of negotiations with its lenders.
A poll conducted last week by Metron Analysis showed that 60 percent of Greeks believe that it is the euro zone that should back down in the negotiations, while 20 percent believe that Greece should back down and 18 percent of participants said that the two sides should compromise.
When asked if a compromise is possible, 80 percent of Greeks said they were optimistic that there will be a solution that would satisfy both sides, while 17 percent said that there wouldn’t be a solution.
Meanwhile, Syriza remains by far the most popular party in the country, with 47.8 percent saying they would vote for the party in elections, more than double the support for the opposition New Democracy party, which polled 21.1 percent.
This story first appeared in Wirtschaftswoche. Siobhán Dowling, an editor at Handelsblatt Global Edition, contributed to this piece. To contact the authors: firstname.lastname@example.org