Greece Politics May 2016


Greece receives lifeline: fresh funds and debt deal

Following months of delays and stalled negotiations, Greece reached a preliminary, breakthrough deal with its creditors on 25 May, paving the way for EUR 10.3 billion in fresh funds for the debt-ridden economy. In addition, a tentative roadmap on debt relief for Greece was tabled, with the goal of bringing the International Monetary Fund (IMF) back onboard as a lender. While the announcement is positive for Greece’s economic outlook, the agreement lacks details and analysts are skeptical that it is not enough to put Greece’s debt levels on a sustainable track.

The relief plan seeks to ease the burden of Greece’s substantial debt load of over EUR 300 billion, which is equivalent to approximately 180% of the country’s GDP. The plan is for a progressive phase-in of relief measures, contrasting the IMF’s earlier calls for upfront debt relief, conditional on reforms and achieving budget targets. In addition, the agreement is void of concrete numbers and discussion of substantial reductions in debt are not in sight until 2018, essentially kicking tough decisions down the road—significantly after Germany’s federal elections. The IMF and Greece’s Eurozone creditors had been at an impasse over the need for debt relief and assumptions over Greece’s ability to meet fiscal targets. Granting Greece a ‘haircut’ on debt has been seen as politically problematic in some Eurozone countries, especially in Germany where many voters feel frustrated by footing Greece’s bill. In a preliminary debt sustainability analysis published by the IMF on 23 May, the fund stressed that “a substantial reprofiling of the terms of European loans” is needed to ensure debt dynamics are on a downward path.

While many uncertainties persist surrounding the agreement, the dispersion of fresh funds will cover Greece’s payment needs until the end of the year and has allayed fears of a repeat of last year’s events when Greece teetered on the edge of Grexit. Market reaction to the news was broadly positive: Greek bond yields fell and stocks rose following the announcement. In addition, some analysts expect that the European Central Bank will re-introduce a waiver on Greek government bonds, which would support Greek banks. Commenting on the developments, Christoph Weil, Senior Economist at Commerzbank adds:

“In short, an escalation of the crisis has been averted. The key question is whether the decided reforms will actually be implemented. And past experience has not exactly been positive. But without the reforms being put into practice, the country will hardly manage to generate the promised primary budget surplus of 3.5% of GDP on a lasting basis. The danger that the crisis will boil up again in the medium term is therefore a very real one.”

Despite the recent positive developments, Greece’s outlook remains grim. The catalyst for the latest agreement was the passage of a number of tough austerity measures earlier in the month, which will dampen already-depressed private consumption further. The government, with a slim three-seat majority, approved a number of bills to cut spending including tough measures to overhaul the country’s pension and tax systems. Unsurprisingly, the measures were met with a wave of protests by the austerity-weary public across the country.

Against this backdrop, the FocusEconomics’ panel of economic analysts expects GDP to fall 0.5% in 2016, which is up 0.1 percentage points from last month’s forecast. For 2017, the panel expects the economy to return to growth, increasing 1.5%.

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