Greece has scraped through its biggest political and financial challenge this year by securing a tranche of aid from international lenders but the reprieve may only be temporary.
Crunch time for Athens will come at the end of September when EU and IMF inspectors are expected to return to discuss how to plug a budget gap for 2015 and 2016, raising the spectre of more austerity cuts that may spark a new political crisis.
Even if it survives that, Greece will still need more debt relief from the euro zone before it can get back on its feet.
On Monday the lenders approved 6.8 billion euros from an emergency bailout put together in 2012 to keep the economy afloat and prevent a deepening of the regional debt crisis.
The money spares Greece from defaulting on its debt in August and tides it over until after elections in Germany in September.
But Greece will only get the full amount if the coalition government led by Prime Minister Antonis Samaras speeds up reforms to get them back on the agreed schedule.
“It’s certainly going to get tougher both economically and politically,” said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels.
“They’re kicking the issue a couple of months into the future … we’re going to continue with this charade between the troika and the government where everyone knows what’s going on – that it’s entirely unrealistic for Greece to live up to its expectations, both in the short and long term.”
Talk of ‘Greekovery’
After nearly crashing out of the euro last year, Greece’s debt crisis appeared to have largely abated this year and Samaras had even started to talk about a nascent “Greekovery”.
But the seven-month lull came to an abrupt end last month when the government nearly collapsed over the closure of its state broadcaster and 10-year bond yields shot up to over 11 percent from the single digit levels seen earlier this year.
The latest bailout review then showed that after three years and 200 billion euros in aid Greece remains in trouble. Public sector reforms are elusive, tax collection is anaemic, and debt is set to top 175 percent of gross domestic product this year.
Even if Greece can get through its next review, it faces a financing gap that is only likely to be resolved by additional debt relief, this time borne by euro zone states long fed up of Greece’s seemingly unending funding needs and failure to reform.
Complicating matters further, the IMF increasingly faces a questions over whether it can keep supporting a program that may not bring Greece’s debt down to a sustainable level.
With European paymaster Germany unwilling to risk a flare-up in the euro zone crisis before a national election, Greece faces its next major test in September when it must outline savings worth 4 billion euros to bridge a fiscal gap in 2015 and 2016.
Trying to plug it with more austerity could mean the end for Samaras’s shaky two-party coalition, which already lost a junior ally in June when he tried to meet public sector layoff targets by shutting the state broadcaster ERT and firing 2,600 staff.
‘Can’t take any more’
Samaras has already ruled out any further austerity measures for a nation faced with a 27 percent jobless rate and the Socialist PASOK party – his only remaining ally – has made it clear it will not support another round of painful cuts.
“The economy and society can’t take any more measures,” a PASOK official said was the main message to the EU and IMF.
Previously agreed austerity plans are already showing the strains in Greece – municipal workers have called a series of strikes while ERT workers have mounted a successful legal appeal and continue to broadcast from their occupied headquarters.
With just a five-seat majority in parliament, Samaras will find it difficult to find a way to plug the budget hole while keeping his coalition intact, analysts say.
“The flexibility of introducing additional austerity measures over and above those in the current program would be an extremely difficult task for the government given the state of the economy and unemployment,” said Platon Monokroussos, an economist at Eurobank.
Instead of socially explosive layoffs or wage and pension cuts, the government could try and bridge the gap by extending special taxes and levies when they expire or through higher revenues from tax collection, though whether that will be enough to convince the troika remains to be seen.
If the government survives that review without a fresh crisis, the focus will shift to closing the year with a primary surplus before interest payments. This would qualify Greece to seek further debt relief, which the IMF has been pushing for but the euro zone wants to avoid discussing until spring 2014.
Doubts about the future
After a restructuring last year of privately-held debt, over 90 percent of Greece’s outstanding public debt of about 300 billion euros is in the hands of official creditors, mainly euro zone states and the European Central Bank.
Many economists believe restructuring that debt is inevitable to make the numbers add up over the long term, not least because Greece’s economy has consistently missed growth projections, and few believe there is any other way to bring debt to below the 120 percent of GDP target level by 2021.
“From the Greek side, tidying up fiscally is not enough, structural changes in the economy are needed,” said Nikos Vettas, chief of Greek think tank IOBE.
“From the part of creditors, action is needed so that the debt problem does not become a brake on growth – in other words relief commensurate to the course of reforms.”
In addition, funding from Greece’s bailout ends in 2014, but Athens’ assertion that it could start tapping the bond markets from next year to tackle its future funding needs have appeared premature since yields soared in June.
The IMF – which does not expect Greece to return to markets before the end of 2016 – estimates Greece could face a funding gap of between 5.5 and 9.5 billion euros over 2015-2016.
Greece has relatively modest levels of debt maturing after 2014 – less than 10 billion euros annually until over 60 billion euros of debt comes due in 2042 so a small amount of debt relief to extend maturities could make a big difference.
But given Greece’s history of failed reform efforts and missed targets there are many doubts about the future.
“What has the country really achieved? Fiscal adjustment and a reduction in labour costs. What they haven’t achieved is structural reform across the board,” an EU official said.
Even with reforms and economic growth, Greece may have to stay under a bailout programme for longer than currently foreseen, the official said. [Reuters]