Greek tragedy – act three?

In the aftermath of the financial crisis, Greece, like a number of other European countries emerged in a state of economic instability with a budget deficit (the amount the government borrows to meet the shortfall between what it receives in taxes and what it spends) equal to 12.9% of its Gross Domestic Product (GDP) or total economic output.

This was four times the European Union’s (EU) 3% limits. Nine years and three bailout payments (worth €310bn) later, Greece finally has been lifted from the depths of austerity. European finance ministers have agreed to an element of debt relief being granted to the recovering nation. “The Greek crisis ends here” according to Pierre Moscovici, the EU’s economic affairs commissioner.

Over the past ten years Greece has received bailouts from the European Financial Stability Facility, which was created in 2010 with a mandate to safeguard financial stability in the Eurozone. As illustrated below, there have been three programmes created to achieve its objective.

Financial Assistance to Greece 2010-2018

Source: Brookings Education, Data as of June 2018

As part of the latest agreement, €15bn has been released to Greece from the €86bn third programme and is to be used as a ‘cash buffer’ once the third Greek aid programme is successfully concluded.

Furthermore, the EU recently restructured loans that were part of the second programme extending Greece’s most pressing loan maturities by 10 years. This move was intended to reassure markets and allow Greece to borrow at much lower rates. In addition, Greece will receive 4.5bn euros from the European Central Bank, effectively representing a rebate of interest payments made on previous loans. Finally, a decision was made to abolish the stepped-up interest rate margin related to the debt buy-back tranche of the second Greek program. Again, a form of debt interest relief designed to aid the indebted nation.

With this agreed and €9bn already built up, both creditors and the Syriza government optimistically declared that Greece is now financially secure and can be expected to stand on its own two feet. The critical question is whether this debt restructuring will be sufficient to help Greece relax its austerity measures.

The cash buffer of €24bn euros can cover Greece’s payback obligations for the next couple of years. However, with interest rates on 10-year Greek government bonds remaining above 4%, investors are not fully convinced that the country can yet service its debt in the medium-term. Greece has the continent’s biggest debt burden as a proportion of GDP at a staggering 177%. In order to meet its new targets it will have to maintain a budget surplus for the next 50 years and with unemployment above 20% the country is still not out of the woods, despite the new measures.

Supervision of the Greek government will remain tight, to ensure there is no reversion to more relaxed fiscal policies. To remain compliant, Greece will be forced to maintain a budget surplus of 3.5% until 2022, reducing to 2.2% until 2060. These strictures are imposed to improve the likelihood that the €200bn owed to other Eurozone governments is fully repaid.

Time will tell.