To mark the general elections in Greece on Sunday 25 January, EUROPE is publishing a series of articles on the social and economic situation in the country, which hopes to come out of five years of financial programming in 2015. The first two articles are published on Saturday 24 January: - an interview about the viability of the Greek debt with Panos Tsakloglou, former president of the economic advisors at the Greek finance ministry who is currently a professor at the Economic and Business Science University in Athens; - and a timeline of the two financial bailouts for Greece. A special issue dated Monday 27 January will report on the results of the general elections and the implications for the eurozone of the formation of a new Greek government. (Series written by Élodie Lamer, special envoy in Athens.)
PANOS TSAKLOGLOU: ADDRESSING THE DEBT QUESTION THE RIGHT WAY ROUND
The Greek debt question needs to be examined in the right way, says Panos Tsakloglou who, until Gikas Hardouvelis became the Greek finance minister, was the right-hand man of previous finance minister Yannis Stournaras.
In his post as president of the government's financial advisory council, Panos Tsakloglou attended meetings of the euro working group at the Council of national experts that prepares the Eurogroup meetings, and in May 2014, he brought up the issue of easing the Greek debt burden. In vain, because politically the time had not yet come for such a debate because the European elections were on the horizon and the troika of lenders (European Commission, European Central Bank and International Monetary Fund) did not at that point have all the information at its fingertips that was needed to be able to work on the matter.
Eurogroup has laid down three conditions for taking further action on the debt: - Greece must have a primary budget surplus (not including debt-servicing), which has been achieved; - Greece must respect the commitments made under the bailout programme; - a reduction in the debt must be necessary. Some parties believe that it isn't actually necessary, ECB president Mario Draghi for one. “It's very hard to say that debt relief isn't necessary, also it's not necessary in the sense that Syriza is arguing, to have a nominal debt haircut would be extremely difficult to pass through parliament.”
There are certain unique aspects to the Greek debt: its average maturity is quite long, three-quarters of the debt is held by institutions (EFSF, ECB etc) and debt-servicing is not very high. “I can understand that this is something people are looking at, debt sustainability, but the real question is about debt servicability. It is true that nowadays around the globe, debt is at historically high levels. There may be other challenges in the eurozone, Greece's output vis-a-vis the entire European output is small, Greek debt in comparison with the full debt of the eurozone is quite small, there are other larger economies that have extremely high debt ratios and the challenges for their government is to have them under control.”
The unique nature of the Greek debt leads to doubts about the relevance of the debt/GDP ratio. “There are other ways to have an effective haircut without reducing the nominal value of the debt,” saysTsakloglou. The options are well-known and are in fact a red line laid down by the other eurozone nations. One way is to extend the maturity or to reduce the interest rate on loans individual countries have made to Greece, and if that happens, “in my opinion, two more things must take place,” explains Tsakloglou. Firstly, “a proportional increase in the grace period of the Greek loans to give quite a lot of fiscal space for economic growth so that when we start repaying, nominal GDP is far higher.”
And then revising the terms of the Memorandum under which Greece must have a primary surplus for a number of years. “It is true that Belgium has fundamental differences,” over this, says Tsakloglou because the “fiscal institutions in Belgium are stronger than in Greece and quite a considerable proportion of the debt was held by Belgian citizens or banks, so the money stays in the economy,” unlike for Greece. He wonders: “How can you have growth when 4.5 % of GDP is leaving the country every year?” He warns that no matter what government is voted in by the Greek electorate this weekend, a debt agreement will probably have the above four aspects.
The university professor says that the Greek debt has already been addressed the wrong way in the past. “The first programme was looking at Greek debt as a problem of liquidity rather than a problem of solvency. What did they do as a result? They gave huge amount of money, short-term loans and high interest rates.”
The four-pronged option he outlines would have the benefit of getting the IMF and the eurozone to agree and would be positive for the Greek economy.
A third aid programme? There was a high point in April 2014 when Greek five-year bonds produced a yield of less than 5% when it made its first long-term bond issuance since the start or the crisis in 2010. “If we'd stayed the course without announcing a premature exit, continuing the reforms, a complete final review, then a third programme wouldn't be necessary,” says Tsakloglou, and quite possibly a preventative credit line from the European Stability Mechanism (ESM) wouldn't have been necessary either: “But as things stand, there may be a necessity for a third programme. Unless there is an ECCL, speedy conclusion of the troika and the markets calm down again.”
At all costs, the political parties must ensure they form a stable government so that voters are not called to vote in new elections again (as happened in 2012): “If we go for fresh elections, the effect will be disastrous for the economy,” warns Tsakloglou.
THE UNFOLDING OF AN UNENDING CRISIS
Encouraging the European Parliament in 2000 to give its approval to Greece joining the eurozone, Pedro Solbes, the then European economic and monetary affairs commissioner, said that Greece would “not cause problems” in economic and monetary union (EMU).
On 23 September 2004, the EU's statistical office, Eurostat, published revised deficit and debt figures for the eurozone nations (see EUROPE 8792), noting that Greece had not provided the right figures in the years 2000 to 2003. It was not until a new government came to power that figures were notified in September that marked a significant gap with the ones previously transmitted. Michel Vanden Abeele, the then director general of Eurostat, admitted that he had had concerns since 2002. Eurostat decides to send a special mission to go through the budget data from 1998 and 1999 with a fine toothcomb. At a Eurogroup meeting in October 2004, Germany was not happy about the way Commissioner Almunia was trying to boost Eurostat's powers for auditing national accounts (see EUROPE 8812). In November, the Eurogroup had to note that the Greek deficit had overstepped the 3% of GDP cutoff point from 1997 to the year 2000.
In October 2009, the new Greek government announced that the budget deficit risked reaching 12.5% of GDP in 2009, although the authorities had previously been forecasting 6% and their initial objective was 3.7%. “I am extremely upset by the difference between the old figures and the new. This has already happened a few times in the past; if it happens again we will really lose credibility. We've had enough and need the correct figures,” warned the then head of the Eurogroup, Jean-Claude Juncker of Luxembourg as he emerged from a Eurogroup meeting on 20 October 2009 (see EUROPE 10002).
On 22 April 2010, Eurostat assessed Greece's public deficit at 13.6% of GDP for the previous year. The next day, Greek prime minister George Papandreou made a formal request for aid from the eurozone. “Our partners will do what is needed to offer us a safe port where we can get our navy back on an even keel,” he said in a televised interview from the port of the small island of Kastelorizo.
On 2 May, agreement was reached on international aid for Greece (see EUROPE 10131). Eurozone member states promised bilateral loans totalling €80 billion, €30 billion of it in the first year, and the IMF would provide the remaining €30 billion. The €80 billion figure was finally slimmed back by €2.7 billion because Slovakia refused to provide its share of the financing of the conditional loan to Greece. The then Economic Affairs Commissioner, Olli Rehn of Finland, took this very badly: “This is a violation of Slovakia's commitment to Eurogroup to provide temporary and conditional financial assistance to Greece.”
On 21 July 2011, the eurozone agreed on a second bailout for Greece, this time totalling €109 billion, for the period 2011-2014, a plan mobilising the European Financial Stability Fund (EFSF), which was the eurozone's temporary bailout fund that could become fully operational in October. The aid plan included yet more budget austerity and painful reforms, along with a writing-down of Greek bonds held by the private sector (known as 'private sector involvement' or PSI), valued at this stage at €106 billion for the period 2011-2019. At the end of 2011, the holders of Greek bonds decided to voluntarily exchange their bonds for others worth half the face value, guaranteed by the EFSF.
On 30 October, George Papandreou announced that a referendum would be held on the second bailout plan. The announcement sent a shockwave throughout the eurozone, which had to hold marathon meetings to stem the crisis. That same week, ahead of a G20 Summit in Cannes, Papandreou was summoned to explain himself to Europe's leaders and the IMF. The Greek prime minister was told that if there has to be a referendum, then it must take place before the end of 2011 and be about whether Greece remains in the eurozone rather than approval of a financial bailout plan. The financial aid would be put on hold in the meantime.
In the morning of 3 November, the Greek finance minister, Evangelos Venizelos, defends a press release doubting whether it's a good idea to hold a referendum, saying: “Greece's position in the eurozone is a historical battle won by this country and cannot be challenged. This gain for the Greek people cannot depend on a referendum.” The referendum desired by Papandreou is nipped in the bud. Three ministers propose the formation of a coalition government headed by former vice-president of the European Central Bank (ECB), Lucas Papademos. The idea is backed by Antonis Samaras, the leader of the Christian-democrat party, New Democracy, as long as Papandreou leaves. This latter resigns on 9 November. A national unity government headed by Papademos is put in place until the holding of early general elections.
In February 2012, demonstrations become increasingly violent and some forty buildings are set alight in Syntagma Square, opposite the national parliament. In April, a 77-year-old pharmacist sets himself alight. Greeks remain in the streets until October to defend their welfare and social benefits.
A second aid plan is endorsed by Eurogroup on 12 March 2012 (see EUROPE 10573). It includes public aid of €130 billion and a new private sector involvement of €100 billion. Juncker warns that this is a “second chance not to be missed.” In total, along with the money included in the first bailout, the aid up until the end of 2014 is €164.5 billion, €144.7 billion of it from the EFSF and €19.8 billion from the IMF.
In May 2012, the two Greek political parties that favour the second bailout plan see their support slump in the general elections. With just 149 of the 300 seats in the national parliament, New Democracy (108 seats) and PASOK socialist party (41 seats) have to form an alliance with a third party to form a government. Five parties hostile to austerity policies between them grab 151 seats, including a neo-nazi party. This complicates the formation of a government favourable to the second bailout package, unless the pro-European left party, Dimar (19 seats), agrees to come on board. On 10 May, Antonis Samaras (ND) throws in the towel and it's now the turn of the young leader of the anti-austerity Syriza party, Alexis Tsipras, to form a government.
Greece will be forced to hold new elections in June 2012. Campaign speeches are similar to those made today, a few days ahead of the general elections on Sunday 25 January. “Things will change on Sunday. Not just in Greece, but also in Europe,” promises Alexis Tsipras, leader of the coalition around the far-left Syriza party, which is neck-and-neck in the polls with New Democracy. Back in 2012, it said it wanted Greece to remain in the eurozone, but challenged the second bailout programme. Its national growth programme includes getting rid of pay and pension cuts, keeping jobs in the public sector, freezing the privatisation process and a moratorium on repayment of the country's debt.
Germany and the European Commission are not ruling out that Greece might exit the eurozone. “We have done what we could for Greece,” says German finance minister Wolfgang Schäuble on his arrival at a Eurogroup meeting on 14 May 2012. He says the problem with Athens is not a problem with the “generosity” of its lenders. A few days earlier, he said that the eurozone was now better prepared to deal with the eventuality of Greece leaving the eurozone, although he said that would be “terrible.” Over the previous weekend, the then president of the European Commission, José Manuel Barroso, made the first mention of the possibility of Greece leaving the eurozone. Without mentioning which club, he said that it would be better for a member of a club that didn't respect the rules to leave the club.
The eurozone holds its breath. On 17 June, New Democracy wins 129 of the 300 seats in the Greek parliament, thanks to an extra 50 seats granted to the party that wins the elections. It is able to form a majority coalition government with the PASOK socialist party (12.3% of the vote, 33 seats), the other party that backs the second Greek bailout. Radical left coalition Syriza makes a strong breakthrough since the elections in May, winning 71 seats (26.9%). The eurozone breathes normally again.
In June 2012, Yannis Stournaras is appointed finance minister and negotiates the question of debt viability in November of the same year with Eurogroup. At that point, the warning lights are flashing red, despite the first writedown of bonds owned by the private sector. The eurozone agrees that a way must be found to make a further reduction in the public debt burden. In November, there are Eurogroup meetings virtually every week, before which Greece had to arrange a new package of painful cuts. The programme is back on track and the EFSF resumes aid payments, which had been frozen.
Athens is given an extra two years to meet its budget targets, and the debt reduction trajectory laid down in the second bailout is relaxed slightly despite firm disagreement from the IMF. A compromise is struck - the debt should be reduced to 175% of GDP in 2016, 124% in 2020 and then be reduced to substantially below 110% in 2022. In December, Greece repurchases its bond on the market and the private sector buys up no less than 31.9 billion euros-worth, agreeing to a large writedown in the face value, but not quite as high as forecast.
Improvement. With this new impetus under its belt, Greece sees an improvement in its situation in 2013. Concerns now focus on Cyprus and real progress is seen in Greece. In June, an IMF document is leaked that talks of errors in the way the bailout has been managed and criticises Europe's attitudes. The European Commission promises to publish its own report. Nothing comes of it, but the European Parliament issues a report.
In early 2014, Athens takes over at the helm of the Council of EU ministers, and the mission of the troika (European Commission, European Central Bank and IMF) that began in September starts to stagnate. Is this merely a coincidence? After eight months of talks, the Greek authorities and their lenders have tangible progress to present at the Eurogroup meeting in Athens in April.
On 23 April, the troika reveals that Greece made a primary budget surplus (not including debt-servicing costs) in 2013 of 1.5 billion euros, 0.8% of GDP. Simon O'Connor, then spokesman for Commissioner Rehn, describes the figure as “well beyond the target.” The figure was calculated using slightly obscure methods tailored to suit Greece and is used to decide on a number of other figures, such as support for the Greek bank sector. Greece feels it is in a position to launch the process of making a new reduction in its debt, as promised by Eurogroup in 2012 if necessary, if some macroeconomic conditions are met. In April, for the very first time since the start of the international aid programmes, Greece was able to raise €3 billion in five-year bonds at a yield of less than 5%. Good news, but voters are unconvinced. A majority of voters turn to Syriza in the European elections in May.
After six years of recession, the signs of budget and economic recovery in Greece are attended by statements made by the prime minister, Antonis Samaras, who announces a no-strings exit from the eurozone's aid programme. The markets take fright. The government reluctantly follows the Eurogroup's recommendation of cautiously ending the second bailout with a preventative credit line from the European Stability Mechanism, the eurozone's permanent bailout programme that replaced the EFSF. The Greek people cannot take any more.
In December 2014, eurozone ministers decide to extend the Greek programme by two months to the end of February 2015 to make sure that Athens gets the final instalment of aid and bring the troika's work to a close.
The debt question has not yet been settled. EFSF managing director Klaus Regling admits that there is little enthusiasm for taking action. The president of the ECB, Mario Draghi, says that a reduction in the Greek debt won't be needed. This key question for Greece and the eurozone will be crucial, however, in the elections that are now inevitable after Antonis Samaras failed at the end of 2014 to push through his candidate to be the country's next president, Environment Commissioner Stavros Dimas.
The same protagonists as in 2012, the same threats from Germany about a 'Grexit,' the same old denials, the same old promises… Greece doesn't seem to have yet shaken off its Promethean punishment.