Another week, another cliffhanger in the Greek bailout saga. Greece, a tiny country of 11m people at the edge of Europe accounting for only some 2 per cent of Europe’s GDP has been in the news almost continuously for the last few months. Talk of Grexit has been rife again, bringing the continuation of the Euro project itself under scrutiny. Stock exchanges around the world have felt the shock waves. The euro has fallen sharply against the dollar. Shares across the world have been spooked by the uncertainty.
Greece is once again prevented from access to the capital markets. Three-year bond yields, in other words, what Greece would have to pay to borrow commercially, hit 19 per cent this week and ten-year bond yields rose to over 10 per cent on a number of days. The world is waiting with bated breath the resolution of Friday’s extraordinary Eurogroup meeting to discuss Greece’s request for a loan extension to tide it over for the next six months, so it can meet the €10bn or so debt repayment to its international creditors on its obligations coming up during that period.
At least the European Central Bank’s announcement in late January of a massive €1.1tn injection of money into a deflating eurozone through quantitative easing (QE) has so far prevented contagion across other problem countries. Yields elsewhere have, if anything, fallen in anticipation of the bond purchases that the European Central Bank will make in the secondary markets starting March.
But how did we get here? Just last year, Greece was able to raise funds in the market by issuing new three and five-year bonds at rates of just below 5 per cent. After five years of austerity with wages falling by 35 per cent, unemployment up to 27 per cent and GDP cut by a quarter, the economy was beginning to improve on the back of good tourism receipts, and employment had started to improve.
But a failure by Antonis Samaras, the New Democracy Prime Minister, to agree to the 2015 budget in December last year, and a series of losses in parliament tantamount to votes of no-confidence that followed eventually resulted in a snap election on 25 January. The largest party, Syriza, a radical left anti-austerity party formed a coalition to ensure majority in parliament with the Independent Greeks, a right-wing party that shared Syriza’s anti-austerity stance.
They promised an end to the Troika domination of Greek economic policy, a reversal of a number of the more painful measures, an end to the Troika inspired privatisation process and a restructuring, and possibly a write-off, of part of the country’s debt. There were also promises to rehire sacked civil servants, renationalise privatised utilities and lift the minimum wage as well as help people who had been cut off their electricity supply or were denied access to healthcare once they became unemployed.
Since the election, many of the demands have been quickly dropped. No more write-offs, very slow rehirings, a gradual raising of the minimum wage and a rethinking of labour reforms. But enough still there to worry the Europeans, particularly Germany, which has been staunchly against Greece renegotiating anything other than an extension of its bailout programme with all the conditions attached. But in the process, it forget the hardship of the Greek people, the fact that austerity has not resulted in any economic miracle in Greece, and that the internal devaluation that Greece has seen as wages dropped by 35 per cent has hardly encouraged more Greek exports. It has to be recognised that the remedies to the crisis have exposed the flaws of the eurozone construct. Greece could have done a lot more to help itself but in the end it is an extreme symptom of those flaws.
An extension of the loan that would allow the disbursement of an extra €7bn in the first instance for the Greeks to meet their immediate debt repayment obligations – and a renegotiation of the terms of the debt agreements to ease Greece’s burden of its 175 per cent debt to GDP ratio – would cost the Europeans little. A refusal to at least acknowledge the democratic remit of the new, however irritating, Greek government could result in default, a bankrupt country in Europe and a contagion effect across the rest of the eurozone – possibly also the beginning of the end of the euro project itself.
Update: 11.00, 23/2/15
In the end, logic prevailed. The German spin is that the Greeks have capitulated and that they will have some explaining to do to the Greek population. Maybe. That’s politics. There are indeed some rumblings amongst the more left wing faction under the Syriza party umbrella that too much was given away.
But the deteriorating economic situation in Greece since the autumn and the pressures on the financial system made a deal imperative. And in truth they received lots of concessions. This has been an extension of the loan “agreement”, as the Greeks had asked, the hated word “programme” having disappeared from the communique.
Christine Legarde in the press conference that followed the Eurogroup meeting corrected herself when she used the “programme” word and changed it to “contract”. ‘The troika is no more: instead we have “the institutions”. And in return for the Greeks having pledged to keep within the overall conditions of the loan agreement so that no unilateral actions would be taken that would endanger fiscal targets, economic recovery or fiscal stability, they appear to have secured some crucial flexibility in their expected primary surplus to take account of the Greek “economic realities”. And it is the Greeks who will be putting proposals forward this week about how they intend to achieve this in the shorter term, rather than the Europeans in the first instance.
There are still hurdles ahead. The Greek proposals will need to be approved by “the institutions”, ratified by the various national governments that need to present it for a vote soon after, and then agree formally to a four-month extension. A review will follow by April latest and the remaining disbursements will be made. Agreements will also need to be reached on what happens after this period is over. So a great deal of uncertainty remains. But we are a long way from where we were only a few days ago, when Greece and Europe were potentially staring into the abyss.
Vicky Pryce is Chief Economic Adviser at CEBr and author of “Greekononics”, Biteback Publishing
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