Greece once again has narrowly avoided a calamity that could have forced its exit from the euro zone – Grexit. In the early hours on Wednesday, in Brussels, the finance ministers of the euro zone countries reached a deal that will deliver €10.3-billion ($15-billion) in loans to keep Greece afloat through the autumn.
Absent the loans, Greece would have defaulted.
Crucially, the finance ministers, with the urging of the International Monetary Fund, agreed that Greece has no hope of sustained recovery unless its Mount Olympus of debt is whittled down. That realization was a long time coming, way too long.
Greece became the poster child of the "debt crisis" in 2009 and received the first of its three bailouts in the spring of 2010. Forget recession; it has been mired in depression since then. If Greece's bailout creditors, led by Germany, had taken the view six years ago that Greece would remain locked in economic Hades unless it was cut some slack on debt payments, the Greek crisis might have ended far earlier. To be sure, Greece sinned by failing to meet the majority of its restructuring promises. But the creditors sinned, too, by forever submitting Greece to impossible demands while vastly overestimating its ability to return to growth in a hurry. The V-shaped recovery never happened.
Greece, as a result, is still a mess. Unemployment is at 25 per cent, the highest among the OECD countries, and youth unemployment is about double that figure. In a new debt sustainability report released on Monday, the IMF said "Greece will continue to struggle with high unemployment for decades to come." The jobless rate will remain at double-digit levels through at least 2040, when it will drop to 12 per cent, the IMF predicted, and not dip to 6 per cent until 2060. The current and next generation of Greeks, in other words, face a bleak future on the job front.
For the moment, however, both sides can declare a victory of sorts. Greece will get the next instalment of the €86-billion bailout package that was agreed upon last August, plus a commitment for relief on its debt, which last year reached 177 per cent of gross domestic product, the highest in Europe by a long shot. In exchange, Greece agreed to tax increases and spending cuts worth €3.6-billion that will come into effect if it fails to meet its fiscal targets.
The euro zone creditors are happy the deal landed without the drama that turned last year's bailout negotiations into a political soap opera, complete with a Greek referendum and the abdication of its combative finance minister, Yanis Varoufakis. And while they agreed that a debt-relief deal had to come, they succeeded in buying time. Germany evidently insisted that any official relief would not be considered before 2018, when Greece's latest bailout program expires. Conveniently, that's the year after the elections in Germany, where voters are weary of extending favours to a country they consider feckless and corrupt.
The IMF was both winner and loser. It was a winner in the sense that the euro zone ministers finally bought the IMF's line that debt relief was essential – the IMF had been saying so in vain for a couple of years. The IMF was a loser in the sense that its call for "upfront unconditional" debt relief for Greece were not met. The relief effort will have to wait and probably be limited to interest-payment moratoriums for some time, low fixed rates thereafter, and maturity extensions. An outright debt "haircut" is off the table, no doubt to maintain the fiction that the bailout loans will eventually be repaid.
The forecast speed of Greece's recovery and the trajectory of its debt load were called wrong by the euro zone creditors from the outset. In 2010, the idea of handing a haircut to the holders of Greece's privately owned bonds was resisted – a grave mistake in retrospect. It wasn't until 2011 and 2012 that some relief came in the form of the restructuring of Greece's private debt combined with the extension of debt maturities and the reduction in interest rates on the European portion of the bailout loans.
But it was too little, too late, all the more so since the demands for harsh austerity remained in place. The Greek economy kept sinking and the debt-to-GDP ratio kept climbing, to the point that default and an exodus from the euro zone seemed imminent. The IMF estimated that Greece's gross debt-financing needs, now about 15 per cent of GDP, will rise to 30 per cent by 2040 and 60 per cent by 2060 unless debt relief comes. The euro zone finance ministers have now agreed that gross financing needs should remain below 15 per cent of GDP in the medium term.
It appears that Greece will remain a ward of the euro zone creditors for many years, even decades, unless the debt load comes down fast. For that, Greece can certainly take some of the blame. Its restructuring and reform programs have been entirely inadequate. But the creditors themselves are guilty parties, too. The admission today that Greece needs substantial fiscal breathing room should have come years ago. Instead, the creditors and the various short-lived Greek governments have openly battled each other since 2010, with each side making unreasonable demands and excuses as Athens burned. The Greek repair job needed a lighter touch.
Eric Reguly