Greece Debt Talks: Economy, Mood Worsen as Brussels and Cash-Strapped Athens Wrangle over Austerity Conditions to Unlock Bailout Funds (6/1)     Print Email

By James D. Spellman, Strategic Communications LLC

As strains on Greece’s economy, government, and people worsen, the de facto bankrupt country faces a summer of deadlines to repay massive debts that far exceed its resources, underscoring the need for an unprecedented, long-term bailout that Athens and Brussels are at an impasse in their negotiations to produce.

Meanwhile, many unpredictables seem near the boiling point in Greece, including political instability and bank withdrawals, as lenders demand more austerity and greater discipline in public spending while Greece’s four-month-old government says its options are all exhausted, that anything more would be unconscionable on humanitarian grounds.

In tempo with the rhythm in each day’s rhetoric from the negotiations’ “psychological warfare,” bond, equity, and currency markets remain volatile; stocks and the euro plummet when a German official sees the inevitability of Grexit and then regain ground when insiders hint that yet another deal is imminent to avert default.[1] On Wednesday May 27, the Athens General equity index climbed 3.6 percent while Greece’s 10-year government bond rate fell 35 basis points to 11.54 percent, both sizeable moves in one day, showing the range of volatility. Christine Lagarde, IMF head, sent panic through markets  this week saying it was possible that Greece would leave the euro and that resolution was looking unlikely.

Immediately pressing are the June deadlines for repaying the International Monetary Fund €1.6 billion, or $1.76 billion (the first €300 million on June 5; press reports differ on whether Greece has sufficient funds to cover this). In July, €6 billion is due to creditors (holders of Greek government bonds), followed in August by €3 billion the European Central Bank wants repaid. (See chart with repayment dates.) Debt repayments for 2015 total about €30 billion – the most debt (already borrowed) Greece must repay in a single year for the next four decades. Total public debt exceeds 175 percent of the country’s GDP.


Source: Charles Forelle, Pat Minczeski, and Elliot Bentley, “Greece’s Debt Due: What Greece Owes When.” Wall Street Journal, updated May 27, 2015.

The repayments due this summer could be met if the last €7.2-billion ($7.8 billion) loan were to be disbursed out of Greece's €240-billion bailout, which began in May 2010. Arguments between the creditors and Greece’s government have blocked release of this last disbursement for months. A far more extensive bailout package – more money over several years – is needed to ensure Greece has enough cash for repayments due throughout the remainder of this year and beyond.

“Greek debt features a variety of structures, with different terms and conditions and governed principally by Greek and English law,” according to Bloomberg. “The obligations include bonds whose holders voted not to take part in a 2012 restructuring; notes issued in that restructuring; bonds held by the ECB; a series of loans from Europe’s bailout fund, including one used to sweeten the restructuring pill; notes issued last year; the 2010 Greek Loan Facility; and the IMF loans.”[2]

The troika – the IMF, the EU, and the ECB – has insisted that Greece do more to rein in public spending and run a budget surplus. Statements from troika negotiators differ over the specific commitments Greece must satisfy, and dissension within seems to be sharpening.  

In general, the lenders want, first, cuts in government employees’ salaries and, second, pension reforms that ensure the system will be self-funding by automatically cutting pensions whenever a shortfall arises. These measures plus an aggressive program of tax increases are sought to reduce the €1.8-billion budget deficit predicted by the European Commission.

The IMF's chief economist Olivier Blanchard told a French financial newspaper Les Echos that Greece’s efforts so far are insufficient such that the 3-percent budget surplus the country was supposed to achieve this year will not materialize. "Given the latest estimations show a substantial budget deficit for the time being, credible measures are needed to transform this into a surplus and maintain a surplus in the future," he said. "Seeing what has been put forward so far, we are still quite far off." [3]

The IMF also wants greater liberalization of the labor market, which includes blocking reinstatement of collective wage bargaining and relaxing regulations that have made it hard for employers to lay off incompetent workers or change work schedules to meet shifts in product demand.[4]

IMF managing director Christine Lagarde has warned repeatedly that no extension will be granted, underscoring that no developed nation has defaulted on the IMF in 30 years.

Greece’s position is complicated by internal politics of the ruling Syriza party, as shown in last week’s party conclave in nearly half (75 out of 160) backed an immediate “rupture” with the lenders while the majority supported negotiations but drew “red lines” for pension and labor reforms.  

Syriza leaders have been arguing that they have made great strides to meet the troika’s demands. During the spring IMF meeting in April in Washington, Finance Minister Yanis Varoufakis circulated a chart showing government expenditures declining in amount and percentage of GDP between 2011 and 2014. (See below.)


Another chart shows how reforms are generating revenue to reduce the government deficit.


"To the extent that we are able to pay, we will keep on repaying these obligations," spokesman Gabriel Sakellaridis said earlier this week. "It is the government's responsibility to be able to repay all these obligations.... It is also the responsibility of the creditors to be faithful to (their) loan obligations."[5]

“They (the IMF) are asking us to not touch anything (from the austerity measures) that have ruined Greek people’s lives in the last five years,” Labor Minister Panos Skourletis said earlier this month. “The IMF is the most inflexible side … the most extreme voices of the Brussels Group. But there are also calmer voices.”[6]

Greece's interior minister Nikos Voutsis emphasized that country lacks the funds to meet the next repayment. "I want to be very honest, this money will not be given and is not there to be given," he said. “This is known and we are talking on the basis of the optimism that we have - cautious optimism, but optimism none the less - that there will be strong agreement that will allow the country to breathe."[7]

Ahead, four considerations are needed in developing a sustainable, long-term rescue plan:

  • - First, the bailout/repayment structure must transition away from the brinkmanship strategy that is exacerbating tensions to honor sacrosanct deadlines and restructure a debt management and repayment program;
  • - Second, what matters most to enable Greece to reduce its debt are efforts to stimulate growth by helping companies borrow capital for job-creating investments and shoring up Greeks’ perception of the safety and soundness of Greek banks;
  • - Third, the enormity of the debt in comparison to Greece’s ability to repay over the next decade at a minimum will require some haircut in the amount of debt that will be repaid to all lenders; and,
  • - Fourth, a shift in the paradigm of negotiators to see the Greek debt tragedy in geopolitical terms beyond the EU to include the potential national security concerns of a politically unstable Greece.

Meanwhile, depositors with Greek banks have been accelerating their withdrawals over the past week. "The past week in May was more challenging compared to the previous ones in the month, with daily outflows of 200 to 300 million euros in the last few days," a senior Greek banker told Reuters.   Outflows in April totaled roughly €5 billion ($5.44 billion) from €1.91 billion in March, a 261-percent jump.[8]  


[1] Carla Mozee, “European stocks rally on reports Greece near debt agreement.” Marketwatch, May 27, 2015.

[2] Nikos Chrysoloras and John Glover, “What Would Happen If Greece Doesn’t Pay the IMF: Q&A.” Bloomberg, May 25, 2015.

[3] Agence France Presse, “Greek reform proposals 'not enough' - IMF chief economist.” May 25, 2015.


[4] George Saravelos, a Deutsche Bank strategist, quoted in: Allen Mattich, “Odds Still (Only Just) Favor Greek Deal.” The Wall Street Journal, May 28, 2015.

[5] Agence France Presse, “Greece to keep repaying creditors as long as it can: official.” Business Insider, May 25, 2015.

[6] Philip Chrysopoulos, “Greek Labor Min: Greece Willing to Reach Deal but IMF Insists on Tough Labor Reforms.” Greek Reporter, May 4, 2015.

[7] Peter Ryan, “Greece teeters close to default on IMF debt.” ABC News, May 26, 2015.

[8] Reuters, “Greek bank outflows accelerate, reach 5 billion euros in April – bankers.”   May 27, 2015.