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Greece

Greece: Talks intensify but remain stalled as Greece's finances run dry

June 2, 2015

Once again, Greece’s negotiations with its creditors have stalled. Despite weeks of lengthy talks, the government still remains unable to unlock EUR 7.2 billion in aid from the country’s bailout program. The funds, which are part of the EUR 240 billion bailout, are conditional on the country enacting a number of economic reforms—the details of which have been the stumbling block in the negotiations. After missing a deadline to reach an agreement by the end of May, Greek Finance Minister Yanis Varoufakis stated that he is aiming for a deal before 5 June, the same day that a payment of EUR 300 million is due to the International Monetary Fund (IMF). On 1 June, leaders from the European Union, IMF and the European Central Bank (ECB) gathered in Berlin to work on a reform deal which is expected to be presented to Greece sometime this week. Greece’s finances are in shambles and the country owes a total of EUR 1.6 billion to the IMF over the course of June and EUR 6.7 billion to the European Central Bank (ECB) in July and August. Further, the country’s existing bailout agreement is set to expire at the end of June and it is not clear if another agreement will replace it.

While the negotiations remain ongoing, there is an increasing sense of urgency that time is running out to reach a deal. Greece has not received any external financing for over nine months and the government has had to resort to extreme measures to make recent debt payments. On 12 May, Greece had to drain an emergency reserves account held at the IMF in order to make a debt repayment of EUR 750 million to the same organization. In addition, the country has only managed to remain afloat by building up arrears to suppliers and seizing cash reserves from government-owned entities—an unsustainable solution. Moreover, recent data show that the economy is weakening amid fears of a possible “Grexit”. According to a flash estimate released by the Hellenic Statistical Authority (EL.STAT), GDP expanded a meagre 0.1% year-on-year in Q1 2015, which if confirmed, will mark the slowest pace in one year. However, sequential data adjusted for seasonality point to a deeper deterioration than the slowdown suggested by the annual data. GDP contracted for second consecutive period in Q1, sending the economy back into recession. While unlocking the remaining bailout funds will provide a much needed lifeline to the country’s finances, a third bailout program will most likely be needed going forward.

The largest hurdle to reaching an agreement remains the details of the required economic reforms. Prime Minister Alexis Tsipras was elected on an anti-austerity platform and SYRIZA has already had to make many concessions to campaign pledges. Dissent is spreading throughout the party over additional concessions and the coalition government only holds a majority of 12 seats in parliament. In addition, the party has a number of “red lines”, including pension and labor reform, as well as value-added-tax hikes, which has ground talks with Greece’s lenders to a halt. Christoph Weil, Senior Economist at Commerzbank comments:

“We therefore believe the decision is still on a knife-edge. Ultimately an agreement is possible only between the Eurogroup and Greece if the IMF is not willing to make far-reaching compromises. And even if an agreement were to be reached on payment of the remaining funds of the second bailout programme, the “Greek crisis” would not be over; by the autumn, Greece will need a third bailout programme in order to be able to afford the next set of payments that would then be due to the IMF.”

Further, regarding the prospect of a possible “Grexit” Dr. James Nixon, Chief European Economist at Oxford Economics adds:

“We see little appetite on the part of the Europeans to extend additional credit to Greece and little willingness on the part of the new Greek government to accept the conditions that would be attached to any new lending. We put the risk of an eventual Greek exit at 25%. Our simulations show that a simultaneous Greek exit and default would be very negative for the Greek economy with GDP falling by 25% and the new drachma falling by 30%. Despite defaulting, our estimates suggest Greek debt would remain over 100% of GDP while a sustained period without market access would leave Greece constrained to run a balanced budget. Ultimately however, lower debt levels and scope for much faster growth would improve longer-term risks – at a cost.”

Looking ahead, Greece’s future is fraught with uncertainty. The government must walk a tight-rope between balancing anti-austerity campaign promises and satisfying creditors’ demands for reform going forward and, on the extreme side, the chance of another snap election still exists. In addition, if significant concessions are made to reach a deal with creditors there is a possibility that Tsipras may call a referendum on Eurozone membership. Despite the ongoing uncertainty, FocusEconomics Consensus Forecast panelists left their projections for 2015 unchanged this month. Panelists foresee a 0.5% expansion in 2015. For 2016, the panel expects growth to pick up to 2.3%.


Author: Angela Bouzanis, Senior Economist

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