16 June 2017

Yesterday, the Eurogroup reached an agreement on the future of the Greek bailout programme that has been welcomed as a page-turning moment in the never-ending story of the Greek crisis. Prime Minister Alexis Tsipras tweeted, “Today Greece is turning the page. We have a deal that reflects the sacrifices of the Greek people.” Compared to previous Eurogroup statements, the change in rhetoric is marked: the agreement is seen as breaking with the austerity-focused policies of the past by opening up the way for growth and jobs creation in the country. In reality, however, this ‘new’ deal merely expands on the measures already agreed upon in May 2016 and does little to address the core issue of Greece’s unsustainable debt levels.

Following the rationale of the May 2016 agreement, the debt relief measures include smoother repayment schedules, the return of profits from Greek bonds currently held by the ECB and national central banks, and favourable adjustments to interest rates. In addition, the statement excludes the possibility of cuts to the nominal amount of Greece’s public debt and fiscal transfers from other member-states. This move convinced the IMF, which had so far refused to join the bailout, to approve the programme ‘in principle’ – though it will only proceed with the disbursement of cash after the measures are finalised. The IMF’s reluctance to commit to the Greek programme stems from their earlier admittance that their insistence on austerity underestimated the severe recessionary impact it would have on the Greek economy. Indeed, the Eurozone still requires Greece to follow an unrealistically strict fiscal trajectory, achieving a primary surplus of 3.5% of GDP until 2022. This ambitious target, which is well above even Germany’s primary surplus of 0.6%, can only be achieved with the adoption of more austerity measures, which, as we have argued elsewhere, are placing an impossible strain on the Greek economy.

The main innovation of the new agreement is a proposal put forward by French Finance Minister Bruno Le Maire, which ties the provision of debt relief to the growth rates of Greece, so that periods of low growth would enable the country to benefit from more favourable terms for loan repayments. This mechanism, which will be implemented after the end of the current programme, enabled the IMF and the Eurozone to put aside their markedly diverging projections for Greek growth, which had been delaying the approval of the new tranche of bailout cash. Beyond that, however, it does little to address the core issue of debt sustainability and the overly ambitious fiscal trajectory required to keep it in check, as it does not change the nature of debt relief, only the timeline of its provision.

Despite the optimistic rhetoric, the policy responses of the IMF and the ECB prove the point that the new agreement does not actually signal any change in strategy from the Eurozone. The IMF agreed to the deal ‘in principle’, while refusing to contribute financially to the current bailout. Similarly, the ECB did not change its policy of excluding Greek bonds from its monetary stimulus programme, saying “you need to see more clarity on debt to include Greece in the PSPP (Public Sector Purchase Programme).”

These decisions are indicative not only of the Eurogroup’s failure to address the issue from a long-term perspective, but also of the stance that the private sector will likely adopt if and when Greece attempts to borrow from the financial markets. As long as debt remains at unsustainably high levels, confidence in the country’s economic outlook will remain low, private investments will not materialise, and Greece is unlikely to stand on its own feet any time soon.