Greece’s $91-billion bailout is on the line as the EU and IMF play a dangerous game of chicken.
C abbage-wielding farmers in Syntagma Square, bond market jitters and fiery ultimatums by Alexis Tsipras: it is all painfully familiar. After 12 months of relative calm, investors and traders are once again fretting about the chance of ‘Grexit’, even as the eurozone’s fortunes appear to be picking up. Could 2017 be the year Greece is finally pushed out of the single currency, or jumps ship of its own accord?
Its membership is being called into question by a long-running dispute between Brussels and the International Monetary Fund (IMF) in Washington. An upbeat EU claims Greece’s nine years of economic catastrophe are coming to an end, whereas the IMF thinks the outlook remains bleak, especially when it comes to debt. If they fail to find a compromise, Athens will default on €6.3 billion ($6.7 billion) owed in July.
“It is touch and go at the moment as to whether we will get a deal,” Nick Malkoutzis, editor of the economics and politics analysis website MacroPolis, told The World Weekly.
The immediate bone of contention is a fiscal target laid out in Greece’s third bailout programme, which saved the country from bankruptcy in 2015 but came with punishing strings attached. Athens is on track to hit a primary surplus (before interest payments are taken into account) of 3.5% of GDP by next year, as promised in those sweaty summer talks. But the IMF thinks current figures flatter the public finances and that 1.5% is a more realistic goal. In an emotional speech to Syriza party members this weekend Prime Minister Tsipras refused to countenance the alternative: more austerity.
The underlying question is whether Greece can stagger on with public debt approaching 180% of GDP. The IMF accuses the EU, led by Germany, of refusing to acknowledge the true scale of Greece's predicament, predicting that debt could rise to an “explosive” 275% of GDP by 2060 unless creditors relieve the burden (see figure 1).
Yiannos Papantoniou, a former economy and finance minister, neatly sums up this trilemma: “The IMF maintains that German-inspired fiscal targets are unattainable without either debt relief, which Berlin rejects, or new fiscal measures, which Athens does not accept.” Yet the northern creditors where debt relief is politically toxic also take a dim view of Greece’s commitment to reform without the IMF’s watchful eye, and are threatening to yank away the lifeline unless the Fund signs up to the programme.
Europe’s hectic voting schedule has raised the stakes by effectively moving the deadline forwards to February, before the Dutch election in March and the French presidential race in April and May. A change of leadership among eurozone finance ministers - Jeroen Dijsselbloem, who chairs their meetings, may soon find himself out of a job - would further complicate the talks, as would a snap election in Greece itself, which Mr. Malkoutzis considers likely.
Mr. Tsipras is determined not to be seen as a soft touch as Syriza haemorrhages support and protesters return to the streets of Athens, while the IMF is keen to show it has learned from previous botched bailouts. Most importantly, Berlin wants to show it is careful with taxpayer money ahead of the Merkel-Schulz showdown in September. “At the beginning of a crucial election year, [finance minister] Schäuble seems convinced that attack is the best form of defence,” said Wolfango Piccoli and Carsten Nickel of Teneo Intelligence.
Even if the talks go right to the wire in July, a disorderly default is unlikely. “There is no way that the creditors could let Greece default on the ECB two months ahead of the German elections,” the Teneo researchers added. Though trust is thin, relations are far better than in 2015, when Mr. Schäuble almost pushed Greece overboard. And if Syriza loses power, the centre-right New Democrats, far more in tune with Brussels ideologically, would form a government.
The real question, thinks George Pagoulatos of Athens University, is not whether a deal can be reached, but when and of what quality. The longer the brinkmanship drags on, the greater the damage to Greece’s fledgling recovery, which is already stuttering. If the agreement is a fudge that gives Athens enough money to pay its dues but not much else, then the crisis will inevitably re-erupt. But if it includes enough relief to make Greek debt sustainable and let the ECB buy Greek bonds as part of its quantitative easing programme then it might prove to be a turning point, he told TWW.
Caught in the middle of this row are the Greek people. Austerity and ‘structural reforms’ may have brought the budget nearer to balance and closed the current account deficit, but they have exacted a heavy price. The economy is more than a quarter smaller than it was in 2008 (see figure 2), while unemployment is still searingly high at 23% even if it has been inching down. On top of that, islands in the Aegean have borne the brunt of the worst refugee crisis in modern times.
“The state of the administration and of the health, education, and justice systems is worse than at any time in the recent past,” writes Mr. Papantoniou. According to a study by Dianeosis, a think-tank, 15% of Greeks lived in extreme poverty in 2015, up from 2% in 2009.
It is remarkable, given this suffering, that throughout the crisis a clear majority of Greeks have not wanted to ditch the euro altogether. In the most recent Eurobarometer survey 68% of respondents said they were in favour of monetary union. But most also hold the EU in poor regard, and a poll in January suggested support for the single currency is now beginning to dip. If life doesn't improve soon, Greeks may decide to give the drachma another chance.