The threat of Grexit never really went away

Bailing out Greece

Brinkmanship over emergency loans resumes again

The Economist

May 4th 2016 | Online extra


THE tagline of the film “My Big Fat Greek Wedding 2”, which was released in March, is “People change. Greeks don’t.” Whether any euro-zone finance ministers have seen the film, let alone detected any resemblance to their ongoing talks with the Greek government over its third bail-out, is unknown. But the renewed bickering about whether Greece is keeping to its end of the bargain, complete with threats of a snap election if its creditors don’t give more ground, has the air of a duff sequel.



Greece badly needs the next dollop of the €86 billion ($99 billion) bail-out creditors promised it last summer, in exchange for promises of austerity and reform. But it will not get the money until the creditors complete a review of its progress, which has been dragging on since November. The government has scraped together enough cash (by raiding independent public agencies) to pay salaries and pensions in May, perhaps even in June. But by July 20th, when a bond worth more than €2 billion matures, the country once again faces default and perhaps a forced exit from the euro zone. The threat of Grexit is not exactly back; it never really went away.

With a referendum on Britain’s EU membership in June and a possible flare-up of the refugee crisis as summer approaches, the last thing Europe needs is another Greek drama. The European Commission is thus in a mood for compromise. It emphasises that negotiations are “99%’’ complete. But the other creditor, the IMF, is less forgiving. With tax arrears in Greece rising and reforms constantly delayed, the fund has little faith that the programme’s target of a 3.5% primary budget surplus by 2018 can be achieved. It wants Greece to make a contingency plan to raise more money or cut spending further before it approves the next instalment of the bail-out.

In April a meeting of euro-zone finance ministers, intended to approve Greece’s fiscal plans along with the pending disbursement, was cancelled at the last minute. Although negotiators had more or less agreed on a package of €5.4 billion (3% of Greek GDP) in austerity measures, they hit a deadlock over an extra €3.6 billion in contingency measures to be adopted if the primary surplus does not reach 3.5%. The Europeans seem content to have a woolly plan B, but Christine Lagarde, head of the fund, says it will “have to be legislated upfront, have to be credible, and have to be triggered with a degree of automaticity”. Greece’s finance minister, Euclid Tsakalotos, says this is constitutionally impossible.

In fact the biggest constraints are political, not legal. The contingency package would probably involve further cuts to pensions, a direct assault on the base of the ruling Syriza party. Alexis Tsipras, the prime minister, faces a revolt by 53 of his own MPs, led by Mr Tsakalotos. Greece’s main opposition party, New Democracy, now leads in the polls and has called for snap elections. It says it will vote neither for the €5.4 billion austerity package (because it is too tax-heavy and reform-light) nor for additional contingency measures.

The meeting of euro-zone finance ministers has been rescheduled for May 9th. Before that, negotiators on both sides will need to agree on the contingency plan. If they do so, the deal will have to be approved by the Greek parliament by May 24th, when the next finance ministers’ meeting takes place. If Mr Tsipras strikes a deal but cannot get it through parliament, a new election is likely. And several euro-zone governments must get parliamentary approval to sign off on any disbursement of bail-out funds. The potential pitfalls, in other words, are legion.

The irony is that the IMF, for all its current intransigence, is the more forgiving of Greece’s creditors. It wants to reduce the primary-surplus target to 1.5% and to write off some of Greece’s debt. Such concessions are politically indigestible for euro-zone governments, especially Germany’s. The most likely solution, as always, is a fudge: an agreement that gives creditors just enough confidence to release the next slug of cash, without putting Greece’s finances on a sustainable footing or resolving the most heated disputes.

Deal or no deal, election or not, the economy is struggling. Banks are still zombies; many structural reforms (such as to the judiciary, labour and product markets) have been put off; and private investors continue to give Greece a wide berth. Yet other euro members do not want to talk about debt relief. Greeks are not the only ones, it seems, who do not change.

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