Commentary by Danaë LAZARI
On Monday May 9, the EU celebrated ‘Europe Day’, the annual celebration of peace and unity in the EU. As celebratory activities took place across the bloc, the Eurogroup held a special meeting to discuss a not-so-jubilant topic – the Greek debt crisis.
July 2015 vs May 2016
It has been almost a year since the turbulent summer months of 2015, in which Greece became the first developed country to default on an IMF loan and teetered on the brink of exit from the Eurozone, and potentially even the EU. An €86bn bailout package was agreed at the eleventh hour, but not after the country imposed capital controls to prevent bankruptcy, and held a referendum on a deal whose deadline had passed by the time citizens went to cast their ballots. Nevertheless, after another general election in September 2015, Syriza held onto its place in government, and that was that.
Except, not quite. In recent weeks Greece has crawled its way back into headlines. First, a leaked transcript of an IMF meeting caused a stir in Greek political chambers as its contents implied the IMF were deliberately pushing for a Greek default by prolonging negotiations until Greece ran out of money. These claims were dismissed as nonsense by the Managing Director of the IMF, Christine Lagarde. More recently, Greek premier Alexis Tsipras formally requested President of the European Council, Donald Tusk, that Eurozone prime ministers take up bailout negotiations. Mr. Tusk did not call the group to formation, but did highlight the need that member states get together in a matter of “days, not weeks”.
How did this happen?
Although Greece had been out of the main headlines for some months prior to the IMF document leak, no news did not mean good news. Last year’s €86bn bailout deal prevented a Grexit, but the implementation of austerity measures included in the programme have been – unsurprisingly – difficult to pass. The 2015 deal was due a quarterly review in October, when contentious issues such as the possibility of debt relief were to be discussed but talks dragged on and the review was extended. It has not yet taken place. In the meantime, the IMF agreed that the 2015 deal’s budget surplus targets of 3.5pc of GDP by 2018 was unrealistic and formally said as much in a letter sent to Greece’s Eurozone creditors last week. Efforts to meet these surplus targets, the IMF said, would have to be based around deep economic reform rather than cuts. A certain amount of debt relief would also be necessary – otherwise, the IMF would no longer involve itself in negotiations.
Debt relief has been a bone of contention throughout bailout negotiations since the Greek debt crisis first became a crisis. Creditor countries, having electorates to answer to back home, have vehemently opposed any such relief for a nation whose perceived gross mismanagement of its economy and high levels of corruption got it into debt in the first place. Greece has a €3.5bn repayment due in July, and it is understood that the state will not be able to make it without support from creditors and the IMF. As Eurozone countries such as the Netherlands, Finland and Germany insist upon IMF involvement for their continued support of Greece’s bailout, and the IMF is pushing for a different approach to bailouts, negotiations have had to open up again.
The Europe Day Eurogroup
The Eurogroup agreed that Greece would prepare an additional ‘contingency’ mechanism for use in the event it fails to meet the budget surplus target of 3.5pc of GDP by 2018. It also agreed that a benchmark for assessing the sustainability of Greek debt would have to be established, and stated it would consider new possibilities for debt management – although nominal haircuts of the debt were excluded.
What happens now?
Finance ministers will discuss Greece’s debt again in a meeting on May 24. By this time, Greece must have prepared its contingency mechanism. This would see across-the-board budget cuts being implemented if fiscal targets are not reached, but certain sensitive sectors would be protected, according to Greek finance minister Euclid Tsakalotos. The issue of potential debt relief will be taken up again on May 24, as Eurozone ministers are expected to discuss commitments to deliver on promises of debt relief in the short, medium and long term.
There is a certain time pressure, though. EU officials have made it abundantly clear to Mr. Tsakalotos that they unequivocally do not want messy negotiations to take place in the run up to the UK’s EU referendum. As such, a deal must either be agreed within the next few weeks, or wait until after June 23. If they have to wait until after the British referendum, Greece and its creditors will have just weeks to put together a new deal before their debt repayment deadline. In this case, July 2016 may bring a sharp case of Grexit déjà-vu.