Is Greece now on the road to recovery?

By Andrew Walker BBC World Service economics correspondent

23 July 2015

Image caption Things aren't necessarily looking up for Alexis Tsipras

Bailout number three is, more or less, in the pipeline.

Another parliamentary vote - after a bad tempered debate - has ticked some more of the boxes required by the eurozone.

Third Bailout

Perhaps. Though the next few weeks of negotiations will be hard.

So let's assume the third programme will be agreed.

Will Greece comply?

The precise contents are still to be negotiated but it will include many policy commitments that the Greek government and much of the population will hate.

There will be targets for the government's finances, specifically for a primary surplus - that means the government must take in more in tax revenue than it spends, putting to one side the interest it is paying on the national debt.

Greece has managed primary surpluses for the last two years. But after a renewed decline in the economy starting at the end of last year - and severely aggravated by the bank closures this month - it will be very hard to repeat that this year.

To achieve that aim will mean more austerity.

Can the Greek government implement it?

There has been massive austerity already. The adjustment to the government finances has been extraordinary: there is a measure called the structural budget balance: that went from a deficit of 18.6% of GDP in 2009 to a surplus of 2.2% in 2013. (These figures take out the impact of the economic cycle on taxes and public spending and so show - imperfectly - the effort a government has put in to change its financial position.)

Image caption Greek banks have reopened but some restrictions on withdrawals remain

The programme will be subject to continuous monitoring and it's sure to lead to further episodes of tension between Greece and the creditors, and in all probability more occasions when payments are delayed because of slippage in the implementation of the policies.

We had a flavour of the political difficulties the government will face with implementation over the last 24 hours. A statement from a public sector union said: "We will continue our battle so that the new barbaric bailout does not pass and is overturned."

Eurozone governments also expect Greece to make a commitment to a wide range of reforms covering, among other things, industrial action, collective bargaining, and opening closed professions. There's more potential there for political difficulties in implementation.

Economic headwinds

Austerity will also aggravate the weakness of the economy, which is already back in recession.

The usual measure of a government's debt burden is the ratio of the debt to GDP. More borrowing - from the eurozone for the foreseeable future - and weak growth or even continued contraction will mean that debt burden continues rising.

So what Greece needs is a period of decent economic growth. Arithmetically that would help reduce the debt burden, by making it smaller in relation to the

country's GDP. More practically it would help bring in more tax revenue that would make the debt more bearable.

Even on the most optimistic forecasts of economic growth and money coming in from privatising state assets the debt burden will remain high.

Debt relief

So inevitably, the question of debt relief will never be far below the surface.

It has been a priority for the Greek government led by Alexis Tsipras.

First it is important to be clear that Greece has already had debt relief of a sort - as have Ireland and Portugal. There have been no reductions in the principal, the nominal amount that must ultimately be repaid. But the repayment period for the eurozone loan has been extended and the interest rate cut. There have also been longer "grace periods" given before any payment is required.

The eurozone summit statement which agreed the launch of new bailout negotiations held out the possibility of even longer grace and repayment periods to ensure that "financing needs remain at a sustainable level". Any such moves would be dependent on full implementation of the policies agreed in the forthcoming negotiations.

But the eurozone summit also said that outright reductions in the debt to be repaid - what it called "nominal haircuts" - would not be undertaken.

Why not? Two likely reasons. One is domestic politics in the creditor countries. A "haircut" converts a loan quite obviously into a partial hand-out. Cutting the interest rate and extending the repayment period might have the same effect - you would certainly think so if you were a professional investor suffering a loss in what's called "net present value" - but it isn't quite so obvious when a government has to tell the taxpayers at home what they have done with their money.

The other factor is the desire to retain a carrot to encourage Greece to comply with the lending conditions. Once you have given a debt 'haircut' it's difficult to reverse. Retaining the ability to vary the repayment terms gives the lenders more scope to lean on Greek governments in the future to do whatever has been agreed.

Next deadline

For now however, the focus is on agreeing the detailed policy programme for the third bailout. One important date on the horizon is the next big payment owed to the European Central Bank - that is payment for bonds the ECB bought in the financial markets between 2010 and 2012 which are due for repayment on 20 August. Greece will need help to find the money - either funds from the third bailout or, if it is not agreed by then, additional short term bridge finance.

Either way it is a deadline that is likely to generate some further tension, within Greece and between Athens and the rest of the eurozone, as it approaches.

And for the longer term the difficulties ahead are so apparent that many commentators are convinced the issue of 'Grexit' from the eurozone will raise its head again, sooner or later.

Share this story About sharing


Category: Bank

Similar articles: