Apocalypse avoided

By Yannis Palaiologos
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24 June 2015
Greece Greece
The prospect of a disastrous ‘Grexit’ looks to have been averted but there are few grounds for optimism about Greece’s future
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After an agonising five months of negotiations, it seems that a deal is in the offing between Greece and its creditors which will avert an apocalyptic scenario that could have ended up with the country exiting the eurozone.

Last week, with little progress in the negotiations and as the prime minister, Alexis Tsipras, was openly talking about the possibility of a “big no” (i.e. a rejection of the terms offered by the creditors), there was a spike in withdrawals from Greece’s banks. This led the governor of the Bank of Greece, Yannis Stournaras, to ask the European Central Bank governing council on Friday for an increase in emergency liquidity assistance to Greek banks to ensure they had enough money to pay depositors.

The ECB offered just enough to get the Greek banking system through Monday, but the euro’s central bankers made it clear that any further support beyond that day would hinge on the outcome of the extraordinary eurozone summit that had been called on Monday night. The clear implication that, without significant progress, the Greek banks would probably not open on Tuesday, focused Greek minds. A new proposal worked out over the weekend was greeted positively in Brussels as the basis for the final agreement.

The technical teams of the institutions (ECB, European commission and IMF) started crunching the numbers and another extraordinary Eurogroup was called for Wednesday. The hope – and there is still a lot to discuss – is to finalise and sign off on the deal at the EU summit on Thursday. This would pave the way for an ECB decision to allow Greece’s banks to buy more T-bills on Friday, which will allow the government to issue those T-bills next Monday (29 June) and use the revenue to repay €1.6bn to the IMF on Tuesday, thus avoiding a default at the very last minute. Within that same period (by Monday), the Greek parliament will need to vote to ratify the agreement, so that the parliaments of its eurozone partners can then vote to extend the Greek programme for a few months (it expires on 30 June). Without that extension, the €7.2bn that make up the last tranche of the second bailout programme will be lost.

Assuming this very tight schedule is not derailed, the prevention of default and the imposition of capital controls in the midst of the tourist season, is something both Greeks and Europeans can be happy about. But anyone looking ahead beyond 30 June cannot be anything but pessimistic about Greece’s prospects. The can has once again been kicked down the road, the deal will include significant further doses of austerity – the Greek proposal includes further fiscal retrenchment (almost exclusively from new taxes) of €7.9bn in 2015-6, i.e. more than two per cent of GDP in each of the two years – and the creditors have still not made concrete commitments on debt relief. Meanwhile the suspicion with which Athens and its European partners view each other means that conditionality on further disbursements will be adhered to very strictly, keeping the clouds of uncertainly hanging over the economy.

The Greek government, through lack of experience and ideological instransigence, made more than its fair share of mistakes in the long negotiation since it was elected in January. An earlier deal would have meant the economic outlook would not have worsened as much, and the measures required to achieved lowered primary surplus targets (one per cent of GDP this year and two per cent next year, as opposed to three per cent and 4.5 per cent respectively in the previous programme) would have been far fewer.

Having said that, it is far from certain that at that stage – in March or April – the creditors have accepted much lower targets for the primary surplus. More generally, they have not accepted that the failure of the programmes imposed on Greece from 2010-4 is due, more than anything else, to major errors in their design – above all, the insistence on over-ambitious deficit-reduction targets, imposed because key players early on were unwilling to countenance a restructuring of Greece’s debt.

Today, despite two rounds of restructuring, Greek debt is far higher, as a percentage of GDP, than it was in 2009. The main reason is the collapse of GDP, by more than 25 per cent, since the beginning of the crisis. Athens has put forward some interesting ideas on how the debt can be rescheduled to ease debt servicing in the coming years.

Its European partners, deeply mistrustful of Syriza, have shown themselves unwilling to talk about the issue, but it can no longer be put off. The same old strategy – more austerity and the pretense that the debt can be fully repaid – will yield more economic misery for Greece, no matter who is in power, and will further fuel the rise of anti-European and extremist forces in the country.