In May 2010, against a background of spiralling bond yields and falling investor confidence, Greece became the first euro zone country to succumb to an IMF-EU bailout. More than four-and-a-half-years later, and just weeks before the Greek bailout was due to expire, Greece has experienced a political earthquake. While it is unclear if Greece would have been able to make a full return to private markets when its bailout ended this year, the collapse of the government of Antonis Samaras, so close to the end of its bailout programme, raises questions about the former Prime Minister’s judgment.
His decision to call a snap general election in December has backfired for his party and left Greece in unchartered waters. While the rapidity of events in Greece has shaken the European political establishment, in reality Greece has been struggling to meet the terms of its bailout for some time.
In April, the penultimate tranche of EU bailout funds was released after the government finally managed to push through a raft of legislation that included everything from reforming the pharmaceutical sector to extending the shelf-life of milk.
Last summer, troika inspectors returned to Athens, but discussions soon broke down as the government pleaded for more leeway in implementing punishing austerity measures.
In December, the euro group of finance ministers granted Greece a two-month extension on the EU portion of its bailout loans but warned Athens that it still needed to implement further measures in order to receive the final €1.8 billion of EU money due to it under its last bailout review.
As the political dust settles in Athens over the coming days, the central question will be how far EU lenders are willing to go to meet the requirements of the new Syriza-led government.
The immediate focus will be on the final troika review which has been stalled for some months. Whether Alexis Tsipras will engage with the troika on the outstanding review will shape developments over the next few months.
Quite apart from Syriza’s controversial call for debt reduction, its economic proposals are completely at odds with the troika’s demands which need to be met by Greece if it wants to draw down the final €1.8 billion disbursement from Europe. In that sense it is very difficult to see how EU lenders can square off its demands with those of Syriza and sign off on the final bailout payout, although an extension of the Greek bailout could be negotiated which would buy Greece more time.
In terms of Syriza’s broader calls for debt relief, the most likely scenario is that the Eurogroup agrees to a further extension of loan maturities.
EU politicians are canny enough to know that they cannot ignore the democratic will of the Greek public as expressed in Sunday’s elections. In this sense, some form of debt restructuring is virtually certain, though any cut to the nominal debt is highly unlikely, as euro group chief Jeroen Dijsselbloem made clear yesterday in Brussels. In this regard, the role of the ECB is crucial.
As with the Irish bailout, Frankfurt is likely to be the key player in the unfolding Greek drama, playing a quiet but critical background role. The central bank is already providing an emergency liquidity assistance funding line to Greek banks following requests from the country’s main banks earlier this month, after deposits began to seep out of financial institutions.
Greece is also facing a number of imminent debt repayments to its lenders, including €4.3 billion due in March, and around €6 billion in July and August. In addition, reports that the government’s tax take has fallen sharply in the last month as some citizens chose to stop paying their taxes in expectation of a Syriza victory shows the precariousness of Greece’s situation.
In total, Greece has about €7 billion in bailout funds due to it from its various bailout partners. It needs these to service its debts, and while it could issue short-term debt to meet its financing needs, such a move would need ECB approval.
Any move to grant further debt relief to Greece will leave Ireland in a difficult situation. While the Government’s official line is that Ireland already received significant debt relief through the promissory note deal, the extension of bailout loan maturities and a reduction in interest rates, the issue of retroactive direct recapitalisation for AIB and Bank of Ireland is likely to return to the public consciousness.
Minister for Finance Michael Noonan stressed yesterday that this option was still on the table, despite the fact that the Government has quietly moved away from the ESM direct recap option as the value of the banks has increased.
Whatever the implications of the Greek election, the latest twist in the Greek bailout tale has once again revealed a continent divided within itself.
The dejection of the Greek public is a sorry reflection on the dream of monetary and political union that once drove the European project. Speaking in Davos last week, financier George Soros articulated what he believed was one of the key weaknesses of Europe. The euro zone crisis, he said, has made Europe into an “unequal relationship” between debtors and creditors.
As images of protesting Greeks holding banners of German chancellor Angela Merkel again flashed across TV screens, the events in Athens have once again shown how the flaws of monetary union may dangerously undermine the idea of European unity and solidarity on which the European community was founded.
Suzanne Lynch is European Correspondent