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Is the Eurogroup’s offer of a debt restructure really a victory for Tsipras?

Euro & Finance

Is the Eurogroup’s offer of a debt restructure really a victory for Tsipras?

Euclide Tsakalotos, the Greek minister of finance.

[The European Union]

Eurozone finance ministers yesterday (9 May) proposed to restructure the Greek debt, but with conditions that could cost Athens dearly. EurActiv’s partner La Tribune reports.

The Eurogroup discussed the restructuring of the Greek debt at its meeting on Monday, but will not make any decisions for another two weeks. Jeroen Dijsselbloem, the Dutch president of this forum of the eurozone’s finance ministers, said these were “early discussions”.

Short, medium and long-term measures

No decisions will be made before the Eurogroup’s next meeting on 24 May, to give the finance ministers time to consider all possible scenarios. But Dijsselbloem did mention a number of measures that could relieve Greece’s debt burden in the short, medium and long term.

In the short term, the issue is to “improve the management of the debt and reduce its cost”. In the medium term, the grace periods for repayments could be extended and the system of repayment periods adapted.

And in the long term, Dijsselbloem said that “extra measures” could be taken. But if these medium and long-term measures were to be implemented, it would be after the completion of the current programme in 2018.

Completing the programme

When it comes to repaying debt, the medium and long term plan is hugely important. This not only determines the outlook for the state itself, but also its creditors and investors.

So the Eurogroup is wielding the carrot and the stick: there will be no substantial changes to the debt if the programme is not successfully completed.

This is another sign that, whatever Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, and Michel Sapin, the French minister for finance, might say, the “reforms” enacted by the Greek government have not satisfied the country’s creditors.

The proposed restructuring of the debt – which still excludes any kind of debt write-off – remains dependent on Greece’s obedience to its creditors. For the first time, the Eurogroup also raised the possibility of the European Central Bank (ECB) paying back the profits it has made on the Greek debt (estimated at €7.7 billion). But again, only in the medium term, once the current programme is brought to a successful conclusion. And negotiations on this matter will not be easy.

For the International Monetary Fund (IMF), this will be an important factor in its decision on whether or not to enter the programme, but several eurozone countries would see such a move as a substantial and unwelcome “gifts” to Athens.

Dijsselbloem said the IMF was positive about the Eurogroup’s three stage approach. But he added that “nobody has yet made a decision”. So the whole issue is still up for discussion.

Success for Alexis Tsipras

For Alexis Tsipras, who made debt restructuring a priority when he accepted the latest bailout deal on 13 July 2015, this is something of a delayed victory. This discussion, which had initially been tabled for last autumn, has finally been opened.

Greece adopts more austerity reforms ahead of key Eurogroup talks

Greek lawmakers adopted a controversial package of pension cuts and tax hikes as eurozone finance ministers geared up for an emergency meeting today (9 May) to hammer out fresh reforms for Athens to stave off another eurozone crisis.

Finance ministers at Monday’s Eurogroup also welcomed the adoption of a new series of reforms by the Greek Parliament on Sunday evening (8 May). Here too, Tsipras could claim a victory. He imposed the vote on his slim majority coalition government, despite a two-day general strike, so as to arrive at Monday’s Eurogroup meeting in a position of strength.

Concluding the first evaluation

The measures adopted on Sunday were broadly in line with the demands of the creditors. And the Eurogroup stressed that the first evaluation of the current programme had not yet been carried out, but should be concluded the coming days.

The agreement with Greece’s creditors will be finalised on 24 May and could include further reforms to secure the release of the next instalment of bailout money. In this case, the final decision would again lie with the parliament in Athens.

Contingency measures

With eurozone creditors more determined than ever to ensure the participation of the IMF in the Greek programme, they have to make the objective of Greece’s achieving a budgetary surplus of 3.5% of GDP by 2018 realistic.

To guarantee the achievement of this objective, the Eurogroup has invented a new of “contingency” mechanism. If the objective appears to be in doubt, these measures will be brought into force automatically without consulting Greek lawmakers. Tsipras had initially refused to accept any such measures, which he insisted were contrary to Greek law.

No Eurogroup result ‘not a tragedy’, EU official says

If the Eurogroup meeting today (9 May) does not produce any specific results “it’s not going to be a tragedy”, an EU official told EurActiv Greece.

But Athens finally proposed a similar mechanism this Monday, including a series of both automatic and non-automatic measures. According to the Greek daily Kathimerini, these measures, which have been accepted by the Eurogroup, include cuts to some pensions. Rather than a series of precise measures adopted in advance, this is structured as a mechanism for managing public spending, which is legal in Greece.

A statement by the Eurogroup said that a “package of measures would be automatically implemented in the event [of] a failure” by Greece to meet its objectives. But now that Greece has accepted the idea of an automatic “correctional” mechanism, the details of the package itself are beside the point.

A high price to pay

In two weeks’ time, on 24 May, the Eurogroup could decide to release the next portion of Greece’s aid package and propose a way to restructure the country’s debt, which would be hailed from all quarters as a victory. The Greek Minister of Finance Euclide Tsakalotos said he hoped that this agreement would mean that confidence could “finally return to Greece”.

It is possible, but by no means certain, that this will indeed happen. Because this agreement would cost the Greek government very dearly. The austerity measures adopted are extremely severe, including tax hikes for individuals and businesses, increases to VAT, cuts to future pensions and reductions in administrative costs.

The government may have tried to protect the most vulnerable members of society, but this is a real austerity programme for the next two years. It will weigh down Greece’s economy, which is only just recovering from the crisis of 2015. And in view of the contingency measures on the table, this austerity looks likely to continue into 2018. In this context, investors are likely to remain very cautious and economic growth may yet be a way off.

Vicious circle not yet broken

If economic growth does not return, the Greek government will have to deal with new cuts to its revenue. Despite the 2015 increases to VAT, the sales tax is set to bring in less than expected in 2016. Greece appears forever condemned to chase unattainable objectives.

The so-called contingency measures would trigger another wave of austerity, not breaking but strengthening the vicious circle of unattainable targets and endless austerity measures. We cannot ignore this worrying fact, despite Tsipras’ victory cries. Particularly as the restructuring of the debt depends on the success of the current austerity programme.

Athens under surveillance

For now, the Greek government remains under close surveillance. The restructuring of the Greek debt, which would only go part way to solving the country’s problems, depends on the implementation of a number of concessions the prime minister would have preferred not to make, including abandoning his opposition to the target of a budgetary excess worth 3.5% of GDP by 2018 and accepting the system of contingency measures.

But as the IMF said last week, this budgetary excess could prove to be a sword of Damocles, threatening the Greek economy for a long time to come. Time will tell whether the trade-off between a potential restructuring of the debt and a more severe system of surveillance and austerity will pay off.

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