Greece suffers from its own mistakes – A fight without winners - July 20, 2015
The Greek Parliament has ratified with an overwhelming majority the austerity measures required by the international creditors in exchange for the third bailout package that is €85-billion. This means Greece has to face even stricter austerity measures than the ones voted down 2 weeks earlier at the referendum.
It seems that the Tsipras government’s battle of the past 6 months against the creditors was in vain: they wanted less austerity and more tax relief but they miscalculated. They weren’t even close to become a top student who can be excused for certain things. Debt crisis can only be treated by austerities and bailouts are for extending in time the hurtful adjustments. Quitting the Eurozone was probably just a threat, although they didn’t emphasised it, as it is known that unity and integrity is important to the Eurozone and would be defended on any price. Yet, it didn’t matter because the previous bailout packages and permissive policies made unacceptable to allow any more considerable concessions.
Greece’s debt-to-GDP ratio reaches 180% which seems unsustainable, especially that Greece doesn’t have a primary budgetary surplus. However, the main part of the debt has already been written-off and restructured. As a result, 80% of the debt is now owned by the troika of international creditors as part of the the bailout package and the related interest charges are ca. 2%. This is extremely low and in addition, with an average maturity of 16 years which is longer than any other Eurozone country’s debt. Shocking but true that after the last restructuring, interest charges in Greece (in harmony with the GDP) are lower than in Portugal, Ireland or even Italy. This makes it clear that another write-off or a less strict budget is not an option.
However, the Greek government did ease up on austerity, the structural reforms were held-off and when Syriza won the elections no real actions was taken. Due to the never-ending negotiations, Athens is now lack of trust and short of breath. This is what reflected in the current behaviour of the private sector and the people who are trying to rescue their money, which made it even harder for the bank sector. Only the €89-billion ELA provided by the ECB kept the bank sector alive and after the Greek capitulation and the Parliament’s decision, ECB has increased it once again so that this week banks could reopen their doors but by strictly maintaining capital limitations.
As if the international creditors weren’t in accordance anymore. IMF stated that the unsustainable Greek debt should be sorted out in the new agreement. One of the most important components of the IMF’s solution proposal is that European creditors should give 30 years extension to Greece to pay its debts and the maturity date of loans should also be extended dramatically. Europe must see this as well, even if it has kick against it but more and more important decision makers have the same opinion on debt restructuring.
This new rescue package will not solve anything but Greece’s financing for the next few years. Due to the latest austerity measures a period of recession mixed with political crisis might be coming to the country. Structural reforms are inevitable to survive (it would have been needed in case of Grexit as well). Society would also need to be reformed in terms of tax morality. Tax-raising would shadow the economy and lower tax revenue.
There are no winners in this story but instead there are economic damages, wrong decisions and a bitter future for Greece financed by Europe. European integrity is torn but still carries on. However, it is obvious that in the future this will not be enough, we should already start thinking about how to reinforce it. As we could see, there are too many different national interests which make it hard to cooperate. At least, giving a precedent to exit the Eurozone has been avoided for now.