Greece: Tsipras delivers austerity measures, calls for debt relief
October 26, 2015
With its debt-ridden economy already on shaky ground, Greece is preparing for more economic pain after adopting additional austerity measures and unveiling a slim draft 2016 budget in the first weeks of October. The tough measures are designed to pave the way for a crucial EUR 3 billion payment, part of the country’s EUR 86.0 billion bailout agreement, and capped off a whirlwind first month in office for Prime Minister Alexis Tsipras since being re-elected on 20 September. Despite the successful implementation of a number of reforms, Tsipras still faces a daunting to-do list of economic overhauls demanded by Greece’s creditors as part of the bailout program. Among the reforms still to be implemented is a highly contentious tax increase for farmers and a planned overhaul of Greece’s pension system, which has led the country’s largest union to call for a 24-hour general strike on 12 November. The first full review of Greece’s bailout is expected to take place at the end of October or in early November, after being delayed due to September’s election, and is critical to debt restructuring negotiations. Tspiras has been lobbying for debt relief for Greece and Eurozone finance ministers have agreed to discuss a modest restructuring following a successful first review.
The draft budget is designed to win back the trust of the country’s creditors—after months of political wrangling pushed Greece to the brink of “Grexit” in the spring—and meet the targets outlined in the bailout agreement. The budget, which was submitted to parliament on 5 October, contains over EUR 6 billion in austerity measures for the remainder of 2015 and 2016 and sees the economy remaining in recession until 2017. In addition, the budget projects the central government’s debt to rise from 188% in 2015 to 198% in 2016, largely due to the bailout loans. In a speech to parliament on the same day, Tsipras stressed that the government was committed to reducing the country’s debt load, recapitalizing Greek banks and attracting desperately-needed foreign investment. Moreover, Tsipras called for debt relief and stated that the government would propose a number of measures to the country’s creditors, including a reduction of interest rates and a growth clause linking debt repayments to GDP growth. Following the presentation of the budget, on 17 October, the Greek parliament approved a number of economic reforms, including raising the retirement age, pension cuts and a number of tax increases.
Looking forward, although the economic reforms are a critical condition to unlocking desperately-needed funding, the austerity measures and fiscal cuts will drag on the already-depressed economy in the near term. In addition, the Greek government still faces a formidable list of tasks to complete, and while so far the government does appear committed to fulfilling the bailout conditions, risks to Greece’s outlook remain skewed to the downside. Specifically, there is a large risk that in the long run the third bailout agreement could suffer from the same obstacles as the second bailout did: political upheavals, foot-dragging on reforms or that Greece’s economic performance will be poorer than expected. The FocusEconomics panel of economic analysts expects GDP to fall 1.2% in 2015, amid plummeting fixed investment and shrinking consumption. For 2016, the panel expects the economy to remain in recession, contracting 1.3%, which is down 0.1 percentage points from last month’s forecast.