Greek Debt is in the Headlines…Again

In relative terms, the Greek economy is now doing rather well. That is, relative to the last nine years of economic catastrophe, which has seen GDP fall by over a quarter since 2008 and unemployment peak at 28% in 2013 from around 8% before the crisis. Youth unemployment is still stuck at above 50%, signaling a spectacular deprivation of a whole generation that will affect Greek society for decades. Now, at least, the Greek economy appears to be returning to growth, although the 2.7% growth in 2017 predicted by the European Commission looks as fanciful as Jeremy Corbyn winning a General Election tomorrow.

However, the debt debacle has rolled around again due to disagreement between the IMF and Europeans. The IMF believes that the European Commission is being overoptimistic about Greece’s prospects and believe that the 3.5% primary-surplus target by 2018, which was a condition in the 2015 bail-out, could further delay Greece’s recovery. Its projections show Greece’s debts ballooning after 2030; this is due to cheap Eurozone loans being replaced by finance from the private sector. The IMF has laid out two conditions for its participation in the bail-out; pre-legislated reforms from Greece that will come into force at the end of the bail-out in 2018, and also a believable promise from Eurozone governments to relieve Greece’s debt burden through guarantees of long term cheap finance.

However, most European countries do not believe that Greece needs debt relief, and assert that the IMF is being too pessimistic in its projections. However, northern European countries such as Germany and the Netherlands insist on IMF participation in any Greek bail-out as they do not trust the European Commission to oversee Greek reforms. This stand-off is significant as it threatens a payment to Greece from the Eurozone’s bail-out fund, the European Stability Mechanism (ESM), which would redeem €6.3bn of bonds which are due in July. If this money is withheld due to this disagreement, Greece will effectively be in default, and a Greek exit (Grexit) from the Euro will become inevitable.

According to IMF rules, it cannot be part of the bailout unless it judges that it will leave a debt burden which is “sustainable”, which the IMF’s current projections contradict. Therefore, a pledge of debt relief is essential from other Eurozone member states. However, as has often occurred during previous Greek debt crises, politics might get in the way. This would be music to the ears of anti-EU politicians Geert Wilders and Marine Le Pen ahead of general elections in the Netherlands and France respectively. Also, the resurgence of the German Social Democrats under Martin Schulz will require Angela Merkel to play to her party’s conservative base ahead of the German general election in September. Thus, Merkel could take on a more hawkish line as the Greek situation unfolds.

Despite these issues, it is likely that the situation will be resolved through compromise, and Greece will remain in the Euro for the next few years at least. However, at this point the most pressing matter is how the Greek economy will actually get itself back on a sustainable growth path. George Papconstantinou, a former Greek finance minister, believes Greece will require a fourth bailout because its debts are still unsustainable, despite years of austerity and attempted reforms.

While the short term position of Greece in the Euro will probably be secure, it is hard to imagine Greece staying in the Euro when the next global recession hits, as to maintain their primary budget surplus targets would require even more grinding austerity.