It looks like negotiations between Greece and its creditors, after months of talking, are finally coming to a crunch. An agreement is needed next week, we are told, if money is to be made available to allow Greece to meet a €1.5 billion repayment to the IMF at the end of June. The other EU governments are warning that time is nearly up and the IMF has returned its lead negotiator to Washington, saying no progress had been made in recent weeks.
Deadlines have come and gone and there can be no certainty that the latest one may not slip a bit, too. However if the final instalment of Greece’s bail-out is to be released on schedule to make the IMF payment, then time needs to be left for some national parliaments to approve this. A further payment of €3.5 billion to Greece’s private sector creditors is due in mid-July. One way or another, time is now short.
There is much to criticise in the previous bailout agreements, particularly the failure to take a realistic approach to Greece’s debts when the latest €172 billion deal was put in place. Some of the current difficulties could have been avoided if a more realistic plan had been agreed at that time. Greece’s high debt level obliges it to run a surplus on the rest of its budget, in order to be able to service its debts, and thus cutbacks and higher taxes have been imposed.
A lot of time has been lost in the talks between Greece and its creditors already.The tactics of the Syriza-led government have angered its creditors, who feel that it is not showing enough determination to implement the necessary economic reforms. All sides must realise by now that some restructuring of Greece’s debts to official creditors will, at some stage, have to happen. However this is only likely to come on the table if Greece puts forward a credible reform plan. And so far it hasn’t, rejecting the plans put forward by its creditors, but not yet coming up with detailed alternatives.
Some way must be found to restore the trust needed to come to a deal. Defaulting on its debts and – potentially – leaving the euro zone carries huge dangers for Greece and its people. Perhaps in a few years it might emerge from the resulting storm, but the costs in terms of living standards in the meantime would be huge, as would be the risks to financial stability.
A Greek default and exit would also carry costs for Europe going far beyond the cash loss on its debts. It would be a significant blow to the euro project and, politically, to the wider EU. Many argue that the firewalls now in place would prevent economic contagion – but the problem is that no-one can really say what the long-term impact and costs would be of the departure of a currency member.
The danger for Greece is that many in Europe may, in fact, be prepared to take this risk.