The demand for Greek debt relief: Is the cart being put before the horse?

Agora Contributor: Jens Bastian

The focus of economic debates during this electoral campaign in Greece has tended to converge on one issue: Is the country’s accumulated public debt sustainable or does it need to be restructured for a second time after the PSI of 2012? Domestic and international observers of various professional and political provenances have weighed into this debate in the course of recent weeks.

Without a doubt, any answer provided to this recurring challenge is central to the country’s future economic outlook. But the question remains whether the public attention afforded to this issue adequately reflects the short-term obligations that any Greek government must address after the 25 January general elections?

Debt restructuring, in whatever shape and form, is already included in the to-do list that needs to be worked through in any follow-up programme that the Greek authorities are set to negotiate with their European institutional partners. However, spending so much political capital on the debt relief issue now is akin to putting the cart before the horse. Let us discuss why this is the case.

The November 2012 Eurogroup conclusions on Greece agreed that member states would consider “measures … for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio”. Two conditions were stipulated for such a process to be initiated by Greece’s European creditors:

I. Achieving an annual primary surplus. The emphasis here is on the term “annual”. The conditionality implies recurring primary surpluses, but it does not specify a certain number or volume to be attained over time.

II. Full implementation of all [my emphasis] conditions contained in the programme (i.e. the second macro economic adjustment programme) between Greece and the troika.

Greece reached a primary budget surplus (before debt servicing) in 2013 (earlier than predicted) and in 2014, albeit at a lower level in the past year than initially projected. Hence, one key condition of such a grand debt bargain has been achieved. But the devil is in the details of the second leg of these November 2012 compliance requirements.

The aforementioned “full” implementation conditionality critically rests on the conclusion of the sixth review of the ongoing programme between Greece and the troika. The review mission started back in September 2014 in Paris and had already stalled before the election campaign. A resumption of negotiations, let alone a procedure towards its orderly conclusion, is currently nowhere in sight.

What is often forgotten or willingly ignored in the heated debt-restructuring debates is the fact that the IMF in Washington must certify two key assumptions. For one, that Greece is fully financed for the next 12 months. Secondly, that the authorities in Athens have complied with the reform requirements laid down in the second macro-economic adjustment programme.

Both assumptions are the institutional prerequisites for various parliaments in the euro area to accept the release of outstanding funding tranches for Greece totalling roughly seven billion euros. The clock is ticking as Athens risks being left without a financial backstop in the coming months. Furthermore, the successful conclusion of the review would provide the launching pad for any follow-up assistance once the European programme formally expires at the end of February 2015 (after a two-month technical extension).

For those familiar with IMF thinking about Greece, it is fair to say that current events on the ground have not contributed to a pro-Athens atmosphere in the Washington-based fund. Equally, aggressive rhetoric during the electoral campaign from Syriza representatives, including the party leader Alexis Tsipras about Greece having been subjected to “fiscal waterboarding” in recent years, are anything but helpful.

The IMF’s managing director Christine Lagarde, the German Finance Minister Wolfgang Schaeuble or the Finnish Prime Minister Alexander Stubb are experienced enough to ignore such irresponsible references to torture. Nevertheless, such statements are not conducive to starting a working relationship in the event that representatives of the largest opposition party have to conduct negotiations as a Greek governing authority with representatives of the troika.

The timely conclusion of the sixth review by any future government in Athens is key because of the financial implications involved, not just because of suspended tranches from the European side and on the part of the IMF in order to cover widening financing gaps. Moreover, the European Central Bank in Frankfurt is holding back last year’s payment that it is obliged to make to Athens as a result of the profits from the Greek bonds it keeps in its portfolio until maturity.

One immediate victim of this impasse is the development of budget revenues used to calculate the volume of the primary surplus for the past year. But the financial repercussions go further and are deeper. All projections about Greece’s economic performance in the last quarter of 2014 and its prospects for a sustained recovery in 2015 must now be subject to revision.

What this means in practice after the elections is not reassuring at all. Any government taking office in February would restart the negotiations with the troika from a much weaker point of departure concerning the economic fundamentals of the country and the state of its fiscal position.

All these challenges are not the kind of presents any incoming government would want to open after the elections. Rather, they are a can of worms. But they are an institutional reality affecting the course of the Greek real economy today. The implications are serious and there is no room for denial. The consequences could be severe and unpredictable.

*Jens Bastian is an independent economic consultant and investment analyst for southeast Europe. From 2011 to 2013 he was a member of the European Commission Task Force for Greece in Athens. He is a regular contributor to The Agora section of Macropolis. Follow Jens on Twitter: @Jens_Bastian

This article was published in last week's electronic newsletter, which subscribers can receive via e-mail or mobile app. The apps can be downloaded for free at the App Store and Google Play.

2 Comment(s)

  • Posted by: H.Trickler

    > "The review mission started back in September 2014 in Paris and had already stalled before the election campaign."

    I just wonder why the author does not bring up any details about this fundamental obstacle which will make it very difficult for any next government to reach an agreement. There are too many promises of the past Greek government in continuous delay and imho no future government is able to remedy that!

  • Posted by: Dean Plassaras

    You can kiss all prerequisites goodbye.

    Syriza has clearly stated that it has no intention whatsoever of abiding with any of them.

    Which brings us back to square one: Since Syriza is a 100% predictable creation of Berlin's austerity, why did the Troika engineer in fact fabricated these elections?

    To have a pretext for German brutality? or to engineer an ever lower euro to benefit German exports?

    We all know that there is no room for misunderstandings here. A Syriza win is a declaration of War against Berlin and Berlin is doing everything to provoke it.

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