Greece: Greece's bailout extended four more months, tough road ahead
March 3, 2015
Eurozone finance ministers approved a four-month extension of Greece’s EUR 240 billion bailout program on 24 February, putting the country on the path to receive EUR 7.2 billion in aid. However, the funds will not be dispersed unless Greece fulfills a number of conditions including cracking down on corruption and tax evasion as well as honoring the privatization sales that have been completed and “respecting the legal process” of sales in process. The agreement followed weeks of tense discussions between European leaders and Greece’s new SYRIZA-led coalition government. SYRIZA, led by Prime Minister Alexis Tsipras, won the 25 January snap elections after campaigning on an anti-austerity platform. The extension of the bailout is largely seen as a climb-down by Tsipras who had pledged not to continue the previous government’s reform commitments.
Looking forward, the government faces a tough road ahead. Greece has a number of payments due in the next months, including an International Monetary Fund (IMF) loan of around EUR 1.6 billion in March and EUR 6.7 billion due for maturing bonds in July and August, and may need outside assistance. Moreover, it is not clear whether Greece will fulfill the conditions to receive the additional funds from the extension. The IMF and the European Central Bank have vocalized concerns surrounding SYRIZA’s reform stance and confidence that Greece will comply is low. In addition, a large amount of uncertainty remains surrounding what will happen once the extension expires.
Domestically, Tsipras will likely face a challenging environment. SYRIZA had to compromise on some campaign pledges in order to reach an agreement with its European creditors and fulfilling their demands without further concessions will be difficult. Hard-left-wing members of SYRIZA’s coalition, including energy minister Panagiotis Lafazanis, have criticized the government’s actions publically and could challenge Tspiras’ policies. Lafazanis has stated that “there will be no privatization in energy” and he has great influence in the coalition government. Tspiras will have to work with the hard-left fraction to fulfill the loan conditions and there is a risk of political gridlock or snap elections if there is disagreement.
Greece’s outlook is fraught with uncertainty. The government must walk a tight-rope between balancing anti-austerity campaign promises and satisfying creditors’ demands for reform. On the extreme side, the possibility of another snap election or even a ‘grexit’ from the Eurozone still pose a large downside risk. Against this backdrop, FocusEconomics Consensus Forecast panelists revised their projections for 2015 downward this month. Panelists foresee a 1.6% expansion, which is down down 0.3 percentage points from last month’s forecast. For 2016, the panel expects growth to pick up to 2.4%.