After long delays and tough negotiations, the Greek Parliament has formally adopted the measures needed to conclude the current review of the third financial assistance program, amid protests on the streets. The Greek government expects the Eurogroup to come up with debt relief measures.
We have been here before. The conclusion of almost every review of the various Greek financial assistance programs since 2012 went the same way and left largely unfulfilled expectations for official sector debt relief.
Meanwhile, even though almost two-thirds of the three-year financial assistance program have passed, the International Monetary Fund is still hesitating to join the third program. Beyond various reforms, the IMF demands lowered fiscal targets and debt relief – applied only to the European part of the official loans, not its own.
Debt relief measures were promised by European lenders at the inception of the current third financial assistance program. They were supposed to be specified toward the end of the program, conditional on Greece implementing the program conditions. The program ends in only about a year from now and Greece is implementing it, so it is time to think about what will come after.
There is certainly some promising news: economic growth in the past two years was much better than expected after the imposition of capital controls and growth is set to accelerate in the coming years. Unemployment is decreasing, though painfully slowly. The Greek government’s primary budget surplus well exceeded expectations and reached 3.9 percent of GDP in 2016. What’s more, since the Greek economy is estimated to perform well below its potential output level, the so-called cyclically-adjusted primary budget surplus reached an astonishing 8.7 percent of GDP in 2016, according to the European Commission’s May 2017 estimates. While the Commission’s cyclical adjustment methodology has a number of weaknesses, the 8.7 percent primary surplus estimate is remarkable. It suggests that, after all the negotiations and the pain, Greece has implemented major fiscal adjustments.
So what’s next? While Greek public debt is expected to fall, it remains very high. The European Commission’s most recent projection foresees a decline from 179.0 percent of GDP in 2016 to 174.6 percent in 2018. Even if Greece maintains an overall budget balance, new borrowing will be needed, because a large amount of debt will mature in the coming years. Given the high level of debt, the fact that it is mostly concentrated in the hands of official creditors and all the uncertainties that characterize the Greek economy and politics, it is unreasonable to assume that Greece will be able to return to market borrowing at an affordable rate in the foreseeable future.
This leaves bitter choices for the Eurogroup: implement a debt reduction plan drastic enough to make a return to market borrowing possible, or agree to a fourth financial assistance program and continue to fund Greece at a preferential lending rate. None of the options is attractive to euro-area lenders.
Yet since Greece has suffered a dramatic economic and social collapse since 2008 and all Greek governments have abided by the decisions of the Eurogroup, it is now time to fulfill the promise of debt relief and thereby offer more hope for the future.
* Zsolt Darvas is a senior fellow at the Bruegel institute in Brussels.