Since the summer, Greece was hanging on to find out when it would receive the next portion of its bailout tranche from the eurozone and International Monetary Fund. In the early hours of Tuesday, Nov. 27, the suspense ended. Greece’s lenders confirmed they would release the money next month after devising a scheme to reduce Greek debt to sustainable levels. If successful the debt deal will confirm that good things do actually come to those who wait.
When eurozone finance ministers and IMF managing director Christine Lagarde gathered in Brussels at around lunchtime on Monday, it was their third such meeting in two weeks. The two previous attempts to agree to a formula for reducing Greek debt had foundered on serious differences of opinion and macroeconomic technicalities. This time, there was enough flexibility to secure an agreement, which despite being a compromise has the potential to help Greece exit the crisis that has devastated its economy, upset its political system and churned up social turmoil.
“Greece could probably not have expected more from the agreement, which gives Greece some breathing space to effect structural reforms that should have been implemented at the beginning of the crisis in 2010, ” says Dimitris Sotiropoulos, a political science professor at the University of Athens. “This will also allow the government to adopt measures that will help the rising number of unemployed Greeks.”
The formula for reducing Greek debt has several parts, which include a 1 percentage point reduction on the interest rates charged by other eurozone members to lend to Greece as part of the country’s first bailout. This means Athens will have an annual servicing rate of just 0.69 percent for the initial loans from its partners, which is substantially cheaper than the rate at which some of the rescuers borrow themselves. Eurozone finance ministers also decided to extend by 15 years the maturities on loans from Greece’s second bailout and to defer interest payments for 10 years. The European Central Bank will return to Greece any profits it makes from Greek bonds it purchased on the secondary market in 2010 and 2011. Greece will embark on an effort to buy back at substantially reduced prices privately-held Greek bonds with the aim of then withdrawing the bonds from the market.
The aim is to reduce Greek debt to 124 percent of GDP by 2020 and then – should Greece be producing the fiscal performance its lenders want – the eurozone may consider further action, including a possible writedown of loans, to reduce the country’s debt to “substantially lower” than 110 percent of GDP in 2022. Given that Greek public debt is projected to reach 189 percent of GDP next year, the potential for such a substantial debt reduction is a boon for the country.
“A new day begins for all Greeks,” Prime Minister Antonis Samaras said in a brief statement outside his office in Athens moments after the deal was announced in Brussels. One of his coalition partners, PASOK leader Evangelos Venizelos, said the agreement was a chance for Greece to make a “new start.”
Much as the debt pact provides beleaguered Greece with new hope, though, it still has to overcome some of the familiar problems if the formula is going to have any chance of succeeding.
The Greek government is going to come under even greater scrutiny from its lenders, the so-called troika of the European Commission, European Central Bank and the IMF, in order to qualify for bailout funds. The trio agreed to release by December 13 only 34.4 billion euros ($44.38 billion) of the 43.7 billion euros Athens was due to receive by the end of the year. The remaining 9.3 billion euros will be released in three tranches at the beginning of 2013 but only after Greece has met bailout “milestones,” which include the overhaul of its tax system.
The regular inspections by the troika in Greece have proved a source of friction since the start of the bailout program in May 2010, and lenders are in no mood for leniency now. As part of Tuesday’s agreement, Athens will have to place any privatization revenues into a “segregated” account. Money from projected primary surpluses, as well as 30 percent of any extra surplus achieved, will also have to be paid into this special account, which will be used to pay back Greece’s lenders.
Perhaps, though, the toughest challenge will be to overcome the debilitating effects of the recession, which has been affecting Greece since 2008 and has led to the economy shrinking by about a fifth and unemployment to pass 25 percent. The debt sustainability analysis on which the eurozone ministers based their decision has not been published yet. In an analysis published on Tuesday, JP Morgan estimates that the Greek economy would have to grow by about 4 percent per year from 2015 for the numbers to work out.
“While the projected growth rates are probably unrealistic, the more stringent conditionality has become necessary,” says Sotiropoulos. “This is the result of the reluctance of the Greek political elite over the last three years to change the country’s growth model and the resistance of the most privileged sectors of society to structural reform.”
The Greek economy is due to shrink by at least 6.5 percent of GDP this year and is forecast to contract by 4.5 percent next year, so a substantial turnaround is needed for the debt sustainability scheme to work. The next loan tranche will contain 23.8 billion euros to complete the recapitalization of Greek banks, which will provide a boost to the Greek economy but will not be enough on its own.
Also, given that Greece is expected to implement 18 billion euros of austerity measures over the next four years, a demand which stands despite Tuesday’s agreement, it is not clear where the growth will come from. The wait for this particular problem to be solved will take even longer.
