Greece facing long path to recovery

Deutsche Welle
8 Min Read

German lawmakers have voted in favour of a new bailout package for Greece, clearing a major hurdle for providing billions of euros in fresh financial aid to Athens. What’s next for the cash-strapped Eurozone country?
The German parliament’s approval on Wednesday has paved the way for unlocking Greece’s third rescue programme, which will add another €86bn ($96bn) to the €240bn the debt-laden Eurozone country already owes the EU Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) as a result of two previous bailouts.

The new financial lifeline includes funds intended to cover the country’s short-term financing needs such as a €3.2bn loan by the ECB that falls due 20 August. In addition, Greece has to make a string of repayments to its creditors, amounting to billions of euros in the course of the next few months.

The new bailout plan, approved by the Eurozone finance ministers last week, foresees disbursing funds to Greece in stages, with the first instalment worth €26bn. Around €10bn from this initial tranche is expected to be spent on recapitalising Greece’s crippled banks.

The recapitalisation is necessary to shore up the Greek banking sector, which suffered massive capital outflows in the first half of this year amid mounting fears the country may have to exit the euro currency area over its debt crisis. Following a breakdown of negotiations with its creditors in June, Athens even had to impose capital controls to stem the run on banks.

Moreover, restoring strength to Greece’s banks is essential for the economy to get back on a sustainable growth path, which allows the country to bring down its high unemployment – currently at around 25% – and heavy debt burden.

Political uncertainty

Although the Greek economy surprised observers by expanding 0.8% in the second quarter of this year, analysts say the challenges facing the country are likely to dampen hopes for a sustained economic recovery.

They point to a myriad of problems that the leftist government of Prime Minister Alexis Tsipras needs to tackle – most importantly, the series of sweeping economic reforms he was forced to accept under the bailout deal.

In addition, there are growing doubts about the stability of his government after a third of lawmakers from Tsipras’s Syriza party vehemently opposed the cash-for-reforms deal – which requires vast spending cuts, pension reforms and tax rises – forcing Tsipras to rely on the backing of opposition parties.

It was “likely and logical” that Tsipras would now call for a vote of confidence in the parliament, a senior member of Syriza party, Dimitris Papadimoulis, told Greece’s Skai TV, adding that he saw elections as “highly likely” in the coming months.

While reports from Greece suggest that Tsipras might decide on a confidence vote after the upcoming August repayment to the ECB, Greece’s main opposition parties have indicated they will not support him in a confidence motion.

So far, they have backed the prime minister, especially during a crunch vote in parliament two weeks ago that paved the way for the controversial package of reforms demanded by Greece’s creditors.

This has raised the spectre of a snap general election as early as next month, on whose outcome the ability of the Greek government to carry out the agreed reforms is set to be determined.

Debt sustainability

Another key problem facing Greece is the issue of debt sustainability. The country’s debt burden at the end of 2014 stood at about 177% of its gross domestic product (GDP) – a level the IMF, in particular, considers to be unsustainable.

The Washington-based lender therefore is exerting mounting pressure on Eurozone governments to grant debt relief to Greece, a proposal bitterly opposed by some countries such as Germany.

The German government argues that reducing Greece’s debt outright would violate EU treaties, stressing, however, that it remains open to ideas such as extending maturities of Greek debt, a grace period for servicing and lowering interest rates for loans.

The issue has been particularly sensitive in Germany, where there is considerable opposition to grant any form of debt “haircut” to Greece. A chunk of lawmakers from Chancellor Angela Merkel’s conservative CDU/CSU party alliance defied their leader by voting against the bailout on Wednesday, despite attempts by party leaders to persuade the sceptics not to break ranks.

IMF on board?

As part of the efforts to soften opposition to the bailout package, Merkel stressed that the IMF would participate in the programme.

IMF Managing Director Christine Lagarde, however, recently reiterated her stance on Greece’s debt, saying that it “has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own”.

She also noted that the lender will wait until October to decide whether or not it will sign up to the bailout.

The European Commission, on the other hand, stresses that debt owed by Greece to the Eurozone is not an issue for the country’s debt sustainability as Athens already has long grace periods and is currently paying neither interest nor principal on the loans.

However, economists point out that Athens has a problem making repayments to the IMF and the ECB, and Greece’s obligations to the two institutions are estimated to be over €24bn through the middle of 2018. But it is unlikely that either of the two organisations would allow Greece to delay the repayments that fall due.

Way out of the crisis?

While emphasis in the Greek bailout negotiations has been laid on austerity and structural reforms, experts say little attention has been paid to growth-boosting measures that are deemed crucial to revive the economy.

European Commission President Jean-Claude Juncker has proposed an investment plan for Greece worth up to €35bn from regular EU coffers. But the proposal would require the country to use its own money as co-financing, although the EU has now lowered its requirements for co-financing.

Analysts therefore call for increased investment spending in order to boost aggregate demand in the economy.

Speaking to DW recently, Gustav Horn, chief economist and director of Germany-based economics think tank Macroeconomic Policy Institute (IMK), demanded that Athens should be given access to money from Juncker’s investment plan for one year without any co-financing requirements.

“The government would then be able to get an investment plan underway immediately – and they would have to do it due to the time pressure,” Horn said.

The expert cautioned that Greece would only be able to grow out of its crisis if there were investments. He said: “If the rescue strategy is restricted to a continuation of intensified cuts to the state budget, then this bailout programme will fail just as its predecessors did.”

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