Greece: Déjà vu - Greece clashes with creditors
December 20, 2016
Following months of calm and relative compliance with creditor demands, tensions spiked in December between the Greek government and its lenders. On 14 December, the European Stability Mechanism announced it would temporarily suspend a deal to ease short-term debt obligations after the government passed a series of spending measures, including a pre-Christmas bonus for pensioners and a sales tax exemption for the Aegean islands. The spike in tensions is a déjà-vu moment for Greece, reminiscent of earlier battles with creditors, and the market reaction was negative with Greek stocks falling and the country’s 10-year bond yield rising. European Union officials will now have to decide whether to implement the short-term debt relief measures that were agreed to on 5 December and whether the government’s move violates the terms of its bailout agreement. The government is reliant on bailout funds and any interruption in funding could have severe economic effects for the country, but anti-austerity sentiment and a loss of support have put the government between a rock and a hard place as it tries to balance creditor demands and its voters’ wishes.
The debt relief deal included a smoothing of the repayment schedule and a switch in interest rate structure on loans and was aimed at reducing the country’s public debt by 20 percentage points of GDP by 2060. While the deal was a step in the right direction toward dealing with the country’s elevated debt load, many feel it is still too little to address the country’s burden. The FocusEconomics panel sees Greece’s public debt at 181% of GDP in 2016 and easing only modestly to 179% of GDP in 2017 and 176% of GDP in 2018. In addition, the International Monetary Fund had continued to clash with EU lenders over the sustainability of the debt load and fiscal targets contained in the most recent bailout agreement, and has refused to participate in the program.
The increase in tensions bodes poorly for progress in the second bailout review. The Greek government was hoping for a swift conclusion of the review to pave the way for additional funds, as well as the inclusion of Greek debt in the European Central Bank’s quantitative easing program and to facilitate the country’s return to international capital markets. However, the Greek government and its creditors have clashed on some of the needed reforms to conclude the bailout review and these latest fiscal measures have convoluted the question of when the review will be concluded.