Greece’s debt saga grinds on

Great news on Greece, according to the eurogroup of finance ministers. “All the big issues” of a reform package under discussion with the Greek government have been settled. The tax and pension reforms, which Athens must now pass into law, are designed to improve Greece’s primary budget surplus (the overshoot without taking debt service costs into account) of 2% of GDP. The deal unlocks the latest payment from the latest bailout programme (the third since 2010, just in case you’ve lost count), which will avoid a default on payment worth more than 7bn in July.

If you think this rings a vague bell, you’re right. There have been plenty of news flashes like this since the start of the Greek debt crisis, and none of them heralded a definitive end to the affair. This latest chapter in the saga won’t end the “cycle of match, mend and pretend” either, as David Shipley says on Bloomberg.
It should buy Greece time until 2018, but it’s a fudge that won’t resolve the matter.

After nearly a decade of “punishing austerity”, which has seen the economy shrink by a quarter and unemployment stagnate at 25%, the country remains stuck in a “vicious circle”. GDP growth has been hovering around the 0% line for the past two years and fell into the red again in the fourth quarter. Since the bailout began, austerity and structural reforms have failed to stem the decline enough to prevent the overall debt burden from rising ever higher. Greece owes an utterly unsustainable 180% of GDP. Without significant debt relief, the country won’t ever be able to grow fast enough to work off its debt.

The International Monetary Fund has come to this conclusion, but the other main creditor, the EU, still seems to think that with enough effort it should ultimately be able to pay its creditors. But as a paper for the Peterson Institute makes clear, this is a pretty heroic assumption. The EU is working on the basis that Greece’s primary surplus will rise to 3.5% in 2018 and stay there for ten years. No country has ever managed this, and it’s hard to see why Greece, of all states, should suddenly miraculously set a precedent – especially when the government’s “legitimacy is fragile and [the] economy still in tatters”, says Matthew Klein in the Financial Times. 

Debt relief could involve a straightforward reduction in the amount of debt Greece
owes, but a more politically palatable
option for European electorates may be an extension in loan maturities or reduction in interest rates miles into the future. Until we start hearing discussions along these lines, however, we can expect the Greek debt saga
to grind on and on.

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