It may have felt like Greece’s bailout deal was done, following the announcement of an agreement from the summit of European leaders on Monday morning.
But it’s anything but finished.
Not only is there still much legislation for and implementation of the required reforms to go, there’s the colossal question of Greek debt relief left to tackle. One of the reasons the talks lasted for so long and became so difficult was the issue of Greece’s debt burden.
Athens made a major concession by getting no up-front guarantees on debt in its agreement (among the dozens of concessions it made). German negotiators seemed to be particularly against a discussion of debt relief before another bailout and austerity programme was in place.
But before the negotiations with Greece had concluded, EU Council chief Donald Tusk was suggesting publicly that debt relief would be necessary. Since then, support for cutting the country’s repayment burden has snowballed, leaving Berlin increasingly isolated.
On Wednesday, the International Monetary Fund (IMF) released its own update on Greece’s debt situation, calling the burden of repayments “unsustainable,” moving from “highly vulnerable” at its previous review. Greek repayments would now exceed 15% of its economic output annually and its debt would peak at over 200% of GDP in total.
Michel Sapin, the French finance minister, also joined in to say the French government was on the same page as the IMF.
On Thursday, it was European Central Bank chief Mario Draghi’s turn. He said that the fact Greece needed debt relief was “uncontroversial,” and that the only question was how to do it.
And on Friday, the IMF’s Christine Lagarde said that the whole bailout programme is “quite categorically not” sustainable without debt relief.
Here’s what the negotiation actually says about debt relief:
The Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme and will be considered after the first positive completion of a review.
As is pretty typical of a European summit, there’s a lot of wriggle room here on all sides. The “if necessary” statement could allow some countries to argue that it isn’t necessary, for example.
More importantly, the “full implementation of the measures” in a new programme may be borderline impossible. For example, the privatisation programme that Greece just signed up to is more than twice as optimistic on the revenue it can raise as the previous one was. And the previous one was already probably too optimistic.
German finance minister Wolfgang Schaeuble doesn’t exactly disagree with the fact that Greece needs debt relief — during the negotiations he proposed a “temporary Grexit,” which was partly so that Greece could write down its debts and then rejoin the currency union. It was pretty disingenuous, since it’s extremely hard to believe that Greece would ever leave the euro, restructure its debts and then re-enter, but it was part of the argument.
Schaeuble’s option has been completely pushed off the table by enough of the other participants, so now the only option is debt relief within the eurozone.
At the moment, he’s sticking to his line that cutting Greece’s debt burden is illegal under European treaties. German courts pored over the whole idea of having a European bailout fund at all, and it was only deemed legal in 2014, two years after its establishment.
He may be right about a direct debt haircut — in which Greece’s nominal debts are cut. But the 2012 debt haircut for Greece proves that it is possible.
There are other ways of cutting the debt burden (particularly the annual repayments required) without cutting the nominal level of debt. Those include maturity extensions, which give Greece longer to pay the debts back, and cuts to the interest rates being levied on them.
Interestingly, Schaeuble and Chancellor Angela Merkel haven’t actually ruled out those sort of methods. Back in 2012, Schaeuble hinted at “conditional debt relief” and quickly backtracked.
There’s a reason for that — Germany’s population, more than any large eurozone country, is opposed to debt relief. In a recent YouGov poll, 61% of Germans think Greece should be made to stick to to existing terms of repayment, against just 26% who favour renegotiation. In comparison, 41% of French respondents want the existing terms upheld, and 38% are up for renegotiation.
Merkel and Schaeuble’s own centre-right party’s lawmakers are similarly sceptical of offering an easier ride to Athens. The Chancellor and her finance minister could try to lead the country in a different direction, but they’d likely have an extremely difficult time doing so.
It’s clear that Greece’s debt is currently a major economic problem for the country, and the German public’s dogged insistence on full repayment doesn’t change that. But there’s something of a point to Schaeuble’s position — if Greece doesn’t want to leave the euro and doesn’t reform, debt haircuts could be an irrelevance in the long term. If Greece doesn’t become more competitive, it will return to the pattern seen in the early years of the eurozone, becoming too indebted. Without good growth, we’ll be back here again one day.
At the moment it looks like Greece is going to get some form of debt relief and the German people will just have to accept that. But that could make the national tensions already present in Europe more and more obvious.