Greece’s debt deal is not a game-changer

29 May 2016
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On Wednesday, Greece’s creditors agreed to release more than €10bn in bailout money and to consider ways of restructuring the country’s debt. Some breathed a sigh of relief that a renewed escalation of the Greek debt crisis had been averted. Others observed that, once again, the path of messy compromise had been chosen and the day of reckoning postponed.

It is useful to recall how we got here, and ask whether there is any chance that Greece will escape the fate of being seen as Europe’s eternal problem child. The thoughts of seasoned observers of Greece’s travails over the past half-decade will have turned back to the spring of 2010, the early days of the crisis, when there appeared to be some movement on the issue of possible relief to go along with any eventual bailout programme.

The International Monetary Fund, its fingers burnt in the Argentine debt crisis of 2001, seemed resolved not to make big loans to members unless it could be near-certain that their debt was sustainable, which Greece’s clearly was not. There were meetings between IMF staff and French and German officials. In Athens, the investment bank Lazard did a study on ways to lighten the country’s Olympian debt load.

In the event there was no restructuring in 2010. Instead, Athens signed up for unprecedented austerity, aimed at taking it from a primary deficit in 2009, which was in the double digits as a percentage of gross domestic product, to a 6 per cent primary surplus in 2014.

Then — after the Irish and Portuguese bailouts, weeks of violent street protests in Athens and an aborted referendum — a national unity government oversaw the biggest sovereign default in history. More than €105bn was shaved off the nominal value of Greek debt, and another €130bn was offered as new official financing. Still, Greece’s financing needs were so great that it was committed to reaching a primary surplus of 4.5 per cent of GDP by 2014.

In 2012, after two elections that saw the neo-fascists of Golden Dawn steamroller their way into parliament, and Syriza, a loose coalition of leftists, come within an inch of power, Athens was offered the prospect of debt relief. It was also offered two more years to achieve the 4.5 per cent target. In 2014 it was confirmed that the government had achieved a primary surplus a year ahead of schedule, yet Angela Merkel, German chancellor, proved unwilling to move on the debt. The conservative-led government of Antonis Samaras was unable to complete the final review of the bailout programme and fell from power. It was replaced by Alexis Tsipras and his merry band of Syriza radicals.

The first six months of 2015 were particularly colourful, as were the personalities novel — especially the finance minister, Yanis Varoufakis. The new government in Athens was of at least two minds: its heart was tugging it towards rupture with the creditors; its head, when it was able to keep it, pushed it towards painful compromise. In the end, after allowing the heart to take things right to the edge of the cliff, the head prevailed. The cost was heavy: yet another bailout, yet more unrealistic fiscal targets, leavened only by more vague promises of debt relief.

There is no end in sight for this sorry tale. This week’s deal, for all the efforts of eurozone officials and especially the Tsipras government to put a brave face on it, is anything but a game-changer. Subject to the Greeks meeting the last, humiliating elements of the imposed conditions, the money that will be disbursed will prevent another default this July and will keep the country funded through most of the rest of the year. But any real discussion on debt has been put off until after the end of the programme in 2018 and the primary surplus targets remain unchanged. The IMF caved on both these issues, though it may insist on more specifics if it is to rejoin the Greek programme later this year.

Greek debt deal reflects shifting powers among IMF members

Greek national flags fly from a vendor’s stall outside the Greek parliament on Syntagma Square in Athens, Greece, on Wednesday, July 15, 2015. Parliament will vote Wednesday night on the measures Greece’s creditors demanded as a condition for aid as capital controls ravage an economy that has already shrunk by a quarter since 2009.
Meanwhile, Greece remains mired in a long, desperate depression. It has lost a quarter of GDP since its pre-crisis high in 2007. The unemployment level has hovered around 25 per cent for four years, and youth unemployment has been above 50 per cent for even longer. Pensions have been cut more than a dozen times, yet pension spending relative to GDP, both total and by the government, is among the highest in the developed world. The country’s best and brightest are leaving for more promising lands in droves, and those who are left behind are increasingly fatalistic and indifferent to the institutional collapse that has been gathering pace since Mr Tsipras became prime minister.

Voters are also increasingly sceptical of the euro. Polls comparing attitudes to the common currency now and last spring show that its net approval rating in the eyes of Greek public opinion, though still positive, has narrowed considerably.

This should surprise no one. Greeks elected terrible political leaders who led them to bankruptcy and bungled its rescue programmes. But the insistence of the Europeans — and one country in particular — to ignore reality in the service of domestic politics has been central to Greece’s bailout tragedy. If the eurozone continues to put off the day when losses will be accepted and the Greek economy placed on a sustainable footing, it may find that it waited too long, and the spectre of Grexit will rise once again and reap a terrible vengeance.

Source: FT.COM

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