By Katerina Sokou, Washington DC
“White smoke” indicating agreement from the Malta Eurogroup Meeting of Eurozone Finance Ministers on the Greek bailout program negotiations brought some smiles to the government faces in Athens, together with the hope that the ongoing review can be completed and bailout funds disbursed after months of wrangling with and among its creditors. The Greek government hailed the decision to allow technical teams from the EU and, significantly from the IMF, to return to Athens to reach a staff-level agreement, even while warning that the agreement “will sadden the Greek people.” In exchange for the bailout, Greece has agreed to more taxes and pension cuts over and above the measures already taken.
The measures agreed to were politically difficult for the government, as it had previously categorically ruled them out. They include extra pension cuts of 1% of GDP and tax measures of the same amount, to be implemented in 2019 and 2020, respectively. This agreement is expected to pave the way for the completion of the review and a so-called “global deal” to bring the IMF back into the program. In exchange, the Europeans agreed to take extra measures to make the Greek debt sustainable. Only then can about €6bn in rescue cash be released to avoid a summer default when a series of debt repayments come due.
A new crisis this summer is still possible if there are new complications and the review is not concluded in a timely manner. Dragging negotiations have raised market fears of a replay of the crisis of 2015, when Greece defaulted on a payment to the IMF and held a referendum that rejected a bailout deal proposed by its creditors. At the last minute, the Greek Prime Minister Alexis Tsipras balked at the prospect of Grexit from the euro and decided to agree to an even tougher bailout. This time around, the big issue is how to bring the IMF back into the bailout, as Germany, the Netherlands and Finland insist on IMF participation if the program continues.
The IMF welcomed the progress made in Malta and noted that it can now send its mission back to Athens to conclude the technical review, a positive sign since as the Financial Times noted: “keeping the IMF happy is a key condition to ensure its financial involvement in the three-year rescue.”
As a condition for providing financing, the IMF is also asking for more debt relief measures, to be agreed to within the context of the current review. This is politically difficult for Greece’s European creditors, notably Germany, which heads into elections this fall. Hence the IMF made sure to stress in its announcement that the staff-level agreement would “need to be followed by discussions with euro area countries to ensure satisfactory assurances on a credible strategy to restore debt sustainability, before a program is presented to the IMF Executive Board.”
Greek officials are now hopeful that an agreement can be reached by the IMF Spring Meetings later this month, including some specification of the extra debt relief measures demanded by the IMF. In a last effort to reach a breakthrough, Prime Minister Tsipras held a series of calls with German Chancellor Angela Merkel and IMF head Christine Lagarde. Three Greek ministers also visited Washington to ask for a U.S. intervention that would put pressure on the IMF to take a clear stance on the issue. Recently, the Minister of Digital Economy Nikos Pappas said in an interview at the Atlantic Council that the Greek economy is “ready to grow.” But on the ground, the effects of the lengthy negotiations are already hurting the economy. A Bank of Greece official has told the Financial Times that its growth projections for 2017 will be revised down, to 1.5% from 2.5% last December, due to the severe uncertainty over the conclusion of the review.
Despite capital controls, the delay has caused renewed deposit outflows from the banking sector. Crippled with high non-performing loans and lack of access to market finance, Greek banks depend on the conclusion of the review for confidence to return. This is also expected to open the door for Greece to be included in the ECB’s quantitative easing program, as Greek banks increasingly depend on the ECB’s expensive Emergency Liquidity Assistance to finance their operations. Under those conditions, it is hard for banks to provide financing to the real economy. The longer the review stalls, the more it hurts growth prospects. On a recent trip to Athens, the owner of a nail salon in Vrilissia, a middle-class suburb of Athens, was closing up shop. As he put it, “all I did all day was pay bills.” Faced with ever-increasing tax rates and social security contributions, a total of 100,000 individual professionals are also projected have gone out of business in Greece over the last year—either relocating to other countries or joining the ranks of the unemployed.
The more cornered it feels, the more unpredictable the Greek government may become. The government is thought to hold a €10 billion cash buffer in case the review drags on. However, this is barely enough to meet all its debt repayments due by July, while it is keeping it from an economy that already runs virtually on “thin air.” Greece faces a €1.8 billion bond payment on April 20 and ministries & public utilities have reportedly received instructions to hold back any unnecessary payments until further notice.
Katerina Sokou is Washington Correspondent for Kathimerini Newspaper in Greece.