Sunday

22nd Sep 2019

Analysis

Greece facing post-bailout challenges

  • Greece will shrink and grow older in the next decades, while it must find a new economic model out of the international lifeline (Photo: Spyros Papaspyropoulos)

Thursday, 21 June, is the longest day of the year - and it probably will be for Greece and eurozone ministers, as they try to reach an agreement on the end of the Greek bailout, and lay out a path for the years ahead.

"Serious talks" were going on until the last hours ahead of the Eurogroup meeting in Luxembourg, a senior EU source said.

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  • IMF chief Christine Lagarde. The fund will not lend more money to Greece but EU creditirs have to agree with it on debt relief measures (Photo: Consillium)

The official said that creditor institutions - the European Commission, European Central Bank, European Stability Mechanism (ESM) and International Monetary Fund (IMF) - and the eurozone countries were "converging rapidly" and that there was a "70 to 80 percent chance" for an agreement.

"The spirit is clearly a spirit of common will to achieve a good deal," EU finance commissioner Pierre Moscovici told reporters on Wednesday.

The deal to end the bailout programme that started in 2015 will include four elements: closing the programme's fourth review, which will trigger a last disbursement to Greece; deciding debt relief measures; setting up a cash buffer to help Greece finance itself in the next two years, and establishing a monitoring programme to ensure that Greece continues the reforms required by the creditors.

Since the start of the current programme in 2015, the issue of debt relief has been the most difficult one, with the IMF calling for more relief or budget cuts than Europeans were ready to accept, in order to make Greece's debt more sustainable compared to its economy.

But a compromise solution has emerged in recent weeks, with the IMF only 'approving' measures - without participating in the last disbursement or the cash buffer.

The debt measures are expected to include a extension of maturities - the delay on repaying loans - as well as a buyout by the ESM of previous loans from the IMF and EU.

"Figures will be adapted," in order to satisfy all parties, said Moscovici, who insisted that "a credible debt package [and] a substantial cash buffer" were needed to achieve an agreement.

The last bailout tranche could be around €11-12bn, with an additional amount for a cash buffer, up to €20bn. The amount of debt relief measures still had to be calculated.

In the creditors' language, "credible" means that financial markets have enough trust in the country when it will try to raise money, and that international business is sure the country is stable enough to invest there.

Since the first bailout in 2010, Greece has received €273.7bn from the creditors, including €241.6bn from EU countries.

After eight years of an international lifeline, the main challenge is to ensure that Greece enjoys sustainable growth and does not reverse the reform process.

With a 1.4-percent growth in 2017, and 1.9 percent and 2.3 percent forecasted for this year and 2019, "the economy is starting to be back on track," Moscovici noted.

The commissioner insisted however "all problems are not solved [and that] efforts will have to be pursued for years and years."

Despite leaving the bailout programmes, with a regular review of reforms imposed by the creditors, Greece will still be under a strict control, with specific fiscal targets to meet.

"There will be no rollback unless discussed with the Eurogroup," an EU official warned.

When the programme effectively ends on 20 August, the European Commission will monitor Greece through the generic European Semester mechanism that is applied to all member states - with a control of the budget of reform plans.

It will also launch the so-called 'enhanced surveillance mechanism' under which expert missions will go to Athens and report to the commission and EU finance ministers.

Meanwhile, in Athens...

Meanwhile, the Greek government has been asked to submit a growth strategy, to be be included in Thursday's agreement package as a guarantee.

The plan "needs to show that there will be a responsible fiscal policy in the medium-to-long term," Moscovici pointed out.

While previous versions of the plan have been described as "not specific enough" by EU officials, but Greece's deputy finance minister, Alexis Charitsis, insisted that the final strategy would be "accompanied by a list of actions, that all ministries are committed to implement with a timeline."

Under the plan, Greece will focus on economic sectors in which it says it has a "comparative advantages": agriculture and food, manufacturing, tourism, energy.

It will try to further reform its administrative, justice and tax systems to facilitate foreign investment, including by non-EU countries like China, and the export of goods.

It will seek private investment in key sectors like transport infrastructure and logistics, energy, shipping, pharmaceuticals, while trying to develop starts-ups, research and development and higher education.

"We should try to combine successes in tourism with other sectors," Charitsis said. "Greece could be a hub for products to Balkans and Central Europe."

Stability is central

Beyond the debt measures and the size of the cash buffer granted by the creditors, the success of Greece's exit of the bailout era will also depend on the political stability in the country.

Prime minister Alexis Tsipras's Syriza party is lagging behind the centre-right New Democracy in opinion polls.

The next elections are due in September 2019 but many expect them to take place earlier, possibly at the same time as the European elections in May.

But the situation at the end of the bailout, or over the agreement with neighbouring Macedonia about its name could precipitate a vote - Tsipras survived a confidence vote in parliament over the issue last week.

Despite a possible change of government in the coming months or years, there is a consensus on the need to reassure Greece's partners and investors.

"All political parties engaged in discussion, this is something that was missing before," Charitsis insisted, noting that "one of weaknesses of the Greek economy was the lack of strategic vision about future."

In the Greek population, almost a decade of crisis and international supervision have also created the conditions for more acceptance of the efforts still to be made.

"There is a better understanding of the mechanism to back to to growth," argued Kyriakos Pierrakakis, research director at the Dianeosis think tank in Athens.

He pointed out that "the majority of people who would lose the most from the reforms would not be against them. "It's a big step," he said.

Pierrarakis also noted that "trust towards Europe is higher than before, and that gives further credibility for certain reforms that will be necessary in the next months and years."

Three years after Greece almost exited the euro, only 26 percent are in favour of a return to the drachma, the former Greek currency, against 33 percent in 2017, according to recent Dianeosis research.

Shrinking population

But after the first years of discipline to meet fiscal targets, finish the reforms and find a sustainable growth path, the main challenge will be the long term demographic decline of Greece.

In 2050, the Greek population is expected to be down to 8.8 million people, compared with 10.8 million now and 11.1 million when the crisis started in 2009.


"The country will shrink and grow older, this affects the pension system significantly, as well as the migration policy and the overall economic policy," Pierrarakis said.

"If you have a country that is 22-percent smaller, the economy will shrink." he added. "Trying to grow while the population is shrinking is like trying to run with someone pushing you back."

Greek bailout exit takes shape

At a meeting next week, eurozone finance ministers and the IMF are expected to agree on new cash, debt relief measures, and a monitoring mechanism to ensure that Greece can live without international aid for the first time since 2010.

Debt relief talks mar Greek bailout exit

While the Greek government has committed to fulfill the last creditors' requirements in the coming month, Europeans and the International Monetary Fund are still far from an agreement on measures to reduce the country's debt in the future.

Greece and creditors prepare bailout exit

Greece's creditors agreed to unblock €6.7 billion of new aid by April and to open debt-relief talks, ahead of the end of the programme in August.

Greece and creditors proclaim 'end of crisis'

After late-night talks, the Eurogroup agreed on a €15bn disbursement and debt relief measures for Greece, while setting out a tight monitoring when the bailout ends in August.

Analysis

Greece exits bailouts, but difficult path ahead

"Greece's recovery is not an event, it is a process," EU commissioner Pierre Moscovici says. Statistics, and differences of views between the country's creditors, show that the process will not be easy.

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