MacroPolis

The stock phrases came thick and fast after Monday’s Eurogroup. “Great progress,” “very close” and “an agreement in a few weeks” were a few of the perennial quotes trotted out again by officials following a failed attempt to settle differences over Greek debt relief.

 

There are various interpretations of why no agreement was reached. Some reports suggest that Germany and the International Monetary Fund were not able to bridge their differences over Greece’s growth forecasts and fiscal targets, others that Athens rejected a compromise solution that would have secured a bailout tranche but led to the debt discussion being postponed until after the German elections in September.

 

The exact reason behind the stalemate is less important than the message sent by the failure to settle this matter, which has been pending since 2012, when a Eurogroup in November of that year first suggested further debt relief measures could be considered by Greece’s lenders. The pledge for restructuring was renewed and made more specific at the meeting of eurozone finance ministers last May. A few weeks ago, IMF managing director Christine Lagarde and German Chancellor Angela Merkel met in Berlin to discuss this issue and reportedly came to an understanding. Numerous discussions have been held on this matter between Greece’s creditors since then. Yet, we seem to be back at square one.

 

As complex as the Greek debt issue may be because of the various players involved and the way that it feeds into domestic political debates, there was no excuse for any party to arrive at the meeting in Brussels on Monday without a clear appreciation of what needed to be done.

 

The lenders undertook a commitment to Greece on May 9 last year, when the Eurogroup agreed that it would consider “if necessary, possible additional debt measures aiming at ensuring that Greece’s refinancing needs are kept at sustainable levels in the long-run.”

 

The subsequent May 25 statement outlined what these interventions could be. It also clearly set out the process under which they would be agreed and IMF officials would recommend to the organisation’s executive board to join the Greek programme with funding.

 

“It is recognised that, consistent with IMF policies, approval of this arrangement will also be based on a new DSA and the assessment of possible debt relief measures mentioned above,” says the statement. The message is clear: the eurozone will have to satisfy the Fund that Greece’s debt will be made sustainable with the interventions proposed and then the Washington-based organisation will participate in the programme.

 

However, what was reportedly proposed in Brussels on Monday would see the IMF green light its participation in the programme subject to the detailing of debt relief measures at a later date, allowing Greece to receive funding from the Europeans just in time to pay 6.5 billion euros of debt obligations in July, including bonds held by the European Central Bank. This seems a betrayal of the IMF’s previous position, which indicated no go-ahead would be given if the debt issue is not settled.

 

So, here we are - waiting for another meeting in three weeks, when the eurozone may, or may not, settle its differences with the IMF so that Greece’s fiscal path can be decided and Athens can have some clarity about what interventions will be made in the coming years so the country’s debt is put on a sustainable path.

 

This will not make an immediate difference to the average Greek (although it can provide some hope that a way out of the crisis can be found) but it will clear a political path for at least the next 12-18 months (a rarity during the seven-year crisis) and give the economy a chance to return to normality.

 

These are all vital elements to Greece’s potential recovery and each of them could be put at risk by further procrastination over the debt issue.

 

Wrong turn

 

If events take such a turn, hopes of Greek bonds being included in the ECB’s QE programme will likely be dashed and plans to ease back into the international bond markets with a test issue in the summer will have to be put on hold. Athens saw these two developments as vital to its ultimate goal of lowering the yields on Greek debt so it could successfully exit the programme in the summer of 2018.

 

The postponement of these moves until later this year or even next year could also harm Greece’s growth prospects. The government has already reduced its GDP forecast from 2.7 percent to 1.8 percent but there will be serious doubts about whether anything close to this can be achieved amid continuing uncertainty about the country’s future.

 

Greece is no stranger to economic turbulence after hardly any growth for almost the last decade but if the economy does not perform this year, it could put fiscal targets at risk. The prospect of more measures being required to make up for any shortfall in public finances would be politically and economically toxic.

 

Prime Minister Alexis Tsipras and his government just approved almost 5 billion euros in new fiscal measures in the hope that this would be the last such package to be put before Parliament for the time being. They did so on the understanding that this was what was needed to keep the IMF on board and prompt the eurozone to agree the debt relief measures the Fund had insisted on.

 

If this arrangement unravels, Tsipras would have every right to feel that he was duped – even if the delay on agreeing debt relief measures is put off for a few months rather than cast aside completely. Apart from the possible hit to the economy, Tsipras would also be left exposed in the face of party members and MPs, who he talked around in recent weeks with his narrative regarding the path out of the crisis.

 

It would also mean Greece being sold short again in the latest discussions about restoring some normality. Once more, its future would fall victim to domestic political reservations, conservative economic thinking, flawed crisis management, institutional inertia and lenders shirking. This would be a deeply demoralising blow after the labours of the last decade.

 

After Monday’s Eurogroup, Greek Finance Minister Euclid Tsakalotos said it “should not be beyond the wit of man” to reach a comprehensive agreement by June 15. Greece’s future may also depend on this not being beyond the will of the men making the decisions at next month’s meeting.

 

The fear, though, is that everyone returns to the negotiating table in Luxembourg in three weeks’ time only to discuss the same proposal rejected by Tsakalotos on Monday. As things stand it is difficult to see how there could be substantial changes in the positions of the IMF or Germany, which appear far apart on Greek growth projections and fiscal targets for the next decades.

 

If nobody moves between now and then, Athens will face a simple but chilling dilemma: Accept a compromise that involves a loan disbursement but no debt relief proposals for now or run the risk of defaulting in July. Greece entering a Eurogroup with its back against the wall has happened numerous times during the crisis and always ends the same way, with Athens buckling. If things turn out as described above, we may wonder how we ended up here again but there can really be no doubt.