The Latest Chapter in Greece’s Debt Crisis
By John Bostwick, Managing Editor, Radius
For a summary of Greece’s debt crisis, check out last Tuesday’s Telegraph article on recently proposed bailout reforms. The article includes a timeline going back to 2001, when Greece dropped the drachma for the euro. The timeline’s second entry sets an ominous tone for every event that follows. Greece underreported its budget deficit between 1997 and 1999. In 2004, Athens admitted that if it hadn’t cooked its books, Greece “would not have qualified for the euro.” Five years after the admission, Greece was sucked into a vortex of mounting public debt, austerity measures, workers’ strikes, referendums and bailouts that’s still spinning.
The latest event on Greece’s debt-crisis timeline occurred last Tuesday, when the European Commission, the European Central Bank, the International Monetary Fund and Greek authorities jointly announced a preliminary policy agreement “to support the recovery in Greece … [that] will now be complemented by further discussions in the coming weeks on a credible strategy for ensuring that Greece's debt is sustainable.”
Reuters explains that last week’s agreement came after “six months of staff-level haggling.” The Greek Parliament must now vote on the agreement, and will probably do so on May 16. Reuters says Athens expects the bill to pass into Greek law, noting that “the government coalition has a small but firm majority.” The eurozone’s finance ministers meet next on May 22, when they'll review the agreement. Both the Greek Parliament and the eurozone’s finance ministers (known as the Eurogroup) must approve the agreement for it to go into effect.
The terms of last week’s agreement don’t appear in the joint statement but they’ve been widely reported. They include concessions by Athens that must seem numbingly familiar to Greece’s battered citizens. Reuters says “the government has promised to cut pensions in 2019 and cut the tax-free threshold in 2020 to produce savings worth 2 percent of gross domestic product.” The agreement also includes promises by Athens to reform its energy industry, liberalize Sunday trade, ease restrictions on terminating employees, and take other steps to promote growth.
An article in The Guardian notes that the latest proposed pension cut is a hefty 18 percent, and that there have been a staggering 12 pension cuts in Greece since the global economic crisis. Pensions have been cut by 40 percent in the past six years alone, and the latest proposed reduction “was met with fury by union leaders, who immediately announced industrial action.” Greece’s unemployment rate is nearly 25 percent, and The Guardian points out that its economy has shrunk by over a quarter since the crisis, which is “far greater than the contraction experienced by the US during the Great Depression.”
In return for its concessions, Greece’s foreign creditors — that is, other eurozone countries, the IMF and the European Central Bank — will issue a roughly $7.6 billion bailout so Greece can repay debt that’s due in July.
The New York Times says that Greece’s total debt burden is about 300 billion euros, which most sources (like the Guardian article mentioned) put at about 180% of GDP. There has been tension between the IMF and eurozone creditors, The New York Times explains, with the IMF pushing for debt relief and “European Union members, notably Germany, [taking] a harder line against Athens.” The Times points out that EU politicians in Germany and elsewhere are facing elections and are “eager to avoid giving fuel to far-right parties” by giving debt relief to Greece. Reuters indicates that the IMF’s “participation in the bailout remained in question” even after last week’s agreement, and that “specific debt relief measures were still needed for the IMF board to consider participating.”
MarketWatch’s Nektaria Stamouli observes that Greece’s debt and foreign creditors’ demands will force the country to “live with extremely tight budgets for many years.” She says moreover that nonperforming loans make up 45 percent of all lending for Greek banks, leading to a private credit squeeze that officials “privately” don’t expect to end soon.
Stamouli does, however, see some cause for optimism. Greece has mostly been barred from international bond markets since 2010, but if the latest round of austerity measures meaningfully reduces Greece’s debt, “the European Central Bank could decide to include Greece in its bond-buying program, effectively clearing the way for Athens to return to capital markets for financing.” She adds that some in Greece’s finance industry are hopeful for renewed interest from foreign investors, noting that “distressed-debt investors are eyeing packages of bad loans , … while there has been interest in Greek real estate, whose prices are down by as much as half since the start of the crisis.” And, she says, Greece’s tourism industry is poised for a “record year.”
Given the country’s decade-long economic struggles, that’s probably the note to end on. Better yet, let’s close with the words of Pierre Moscovici, the European commissioner for economic and financial affairs, who’s quoted by the Times as saying: “It is time to turn the page on this long and difficult austerity chapter for the Greek people. … With this agreement, we need now to write a new story of stability, jobs and growth for Greece and for the euro area as a whole.”