Greece: the long way to go

Since the election victory of Syriza in January 2015, we have been witnessing a new stage of Greece’s sovereign debt crisis. The government of Alexis Tsipras, elected on an anti-austerity platform, negated the substance of the hitherto rescue programmes and their institutional arrangements – in other words, their monitoring by the International Monetary Fund (IMF), European Commission and European Central Bank (ECB). However, facing the danger of default on their forthcoming debt repayments, Greece continued negotiations with its eurozone partners to obtain fresh financing and debt relief. They failed at the end of June, with Tsipras rejecting creditors’ conditionality and calling the referendum in which he campaigned against the agreement with creditors, and which he won by a large majority on 5^th July. Meanwhile, the government of Greece defaulted on the subsequent tranche of debt repayment to the IMF and had to close banks stormed by panicking depositors.

Few days later, the Prime Minister made a surprising U-turn by asking the same creditors for immediate assistance and offering the reform programme rejected in the referendum. After a dramatic two-day negotiation, a sort of framework agreement was announced on 13^th July that offered Greece a third bailout package in exchange for rapid and comprehensive reforms going much further than those demanded in June; they are to be adopted by the Greek parliament in the next few days.

This agreement can help avoid the expected Greek defaults on its debt to the ECB, IMF and private creditors, keep banking system afloat and prevent the potential Grexit. However, this is only the beginning of the lengthy process, and its outcomes remain highly uncertain.

First, details of the financial package, in particular the fiscal targets, other conditionality, resolution of Greece’s large public debt and distressed banking sector, will have to be determined in the coming weeks and months.

Second, the political and administrative capacity of the current and subsequent governments of Greece to deliver on the ambitious reform programme remains a big question given its rather disappointing record in this area.

Third, rebuilding trust is a key factor of success and requires time. The populist policies in the first half of 2015 antagonised not only Greece’s creditors but also society, who were misled by the referendum and the Prime Minister’s post-referendum U-turn, and business. As a result, the beginnings of an economic recovery in 2014 have been damaged, tax collection has dramatically worsened and capital has flown abroad.

One thing remains clear: Greece will have to accelerate the economic and institutional reforms it has delayed for years and decades, and adjust its spending commitments to the size of available revenue. With or without the rescue agreement, within the eurozone or outside, with the debt rolled over and restructured or having become bankrupt, the government will not be able to spend more money than it collects. Actually, defaulting and exiting the eurozone will only make the situation even worse and further narrow the available choices.