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People walk past the Bank of Greece headquarters in central Athens on June 22, 2018.

Petros Giannakouris/The Associated Press

Greece officially completes its bailout program on Monday, after eight years of cutbacks enforced in return for massive loans and following an economic collapse on the scale of the Great Depression.

The exit is a welcome milestone. But it offers little assurance that the 19-country euro currency union has left behind its problems with debt. The huge debt pile in Greece and an even bigger one in Italy will remain a lurking financial threat to Europe that could take a generation to defuse.

Europe’s debt problems have repeatedly raised fears over the past decade of a break-up in the euro, a worst-case scenario that would cause severe economic damage in the region and shake world financial markets and trade.

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In Greece, successive governments had borrowed heavily for three decades to fund generous spending on pensions and jobs given to political supporters, while tolerating widespread tax evasion and covering up budget shortfalls. All that blew up mightily in October, 2009, when Greece admitted its budget deficit was much bigger than previously reported. Shocked investors no longer would risk loaning Greece money at affordable rates, forcing the government to turn to rescue loans from the other eurozone countries and the International Monetary Fund.

The loans came with tough conditions: closing deficits, which led to aggressive tax increases and spending cuts; and a raft of reforms aimed at improving tax collection and the business climate in general. The economy, hit hard by spending cuts, shrank by a quarter.

All told, Greece now owes total debt of €322-billion ($480-billion), or over 180 per cent of annual economic output. Of that, €256.6-billion is owed to eurozone creditors and €32.1-billion to the International Monetary Fund. In 2012, about €107-billion in debt was lopped off by inflicting losses on private bondholders.

Monday is the day the third and last bailout program expires, meaning no more money is available. Greece will remain subject to quarterly visits by technical experts to make sure it is meeting agreed targets for public finances until the last bailout loan is repaid, in 2060.

The other eurozone countries gave Greece enough cash to cover 22 months of financing needs and significantly eased its debt repayment terms. Greece needs to pass the quarterly reviews to activate that debt relief. But Greece will get no new reform requirements.

Some experts say that the best way to help Greece would be for eurozone countries to write off part of the loans altogether. But governments have balked at that. The bailouts were unpopular, particularly in Germany, and loan forgiveness would be a tough sell for leaders such German Chancellor Angela Merkel.

The IMF and prominent economists say that if part of Greece’s loans are not written off, its debt loan will eventually start to rise out of control again. Greece is meant to run exceptionally large budget surpluses before interest payments – so-called primary surpluses of 3.5 per cent of GDP through 2023, and 2.2 per cent thereafter. The IMF says very few countries historically have been able to do that.

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It says countries often quickly undo cuts, as people get fed up over lost services. Spending on state health care in Greece, for instance, has been squeezed to one of the lowest levels in the eurozone, with the poorest 20 per cent of Greeks saying they spend 44 per cent of household income on out-of-pocket medical expenses and many reporting they have simply done without medical care.

George Pagoulatos, a professor at the Athens University of Economics and Business, says that in the end the country’s creditors may have to lower their expectations for how much Greece can save.

He thinks lower surpluses plus better economic growth from the pro-business reforms could be the key to make debt sustainable.

“It doesn’t mean that tax evasion has been eradicated or that governments will no longer do favours for their supporters,” Prof. Pagoulatos said. But the degree of reform should not be underestimated. The changes over eight years “have been very significant and they must have an impact on productivity.”

Italy’s slow growth since joining the euro has meant that the eurozone’s third-largest member has failed to work down the huge debt burden it carried into the currency union when it joined as a founding member in 1999. It remains at an elevated 133.4 per cent of GDP, the second highest after Greece. Officials associated with the coalition between the populist 5 Star Movement party and the anti-immigration League have made comments about leaving the euro and criticized the European Union’s rules limiting debt and deficits. That has raised fears of a new debt crisis.

Eurozone officials have set up ways to protect the currency union in a crisis. One is to have the European Central Bank offer to buy bonds of countries with excessive borrowing costs. But that requires signing up for a plan to reduce the public deficit, and that appears to be the last thing the current government would do. The most drastic alternative would be for Italy to leave the euro.

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Guntram Wolff, director of the Bruegel research institute in Brussels, says Italy’s debt situation is different from Greece’s, in that most Italian bonds are in the hands of Italians. That means the government’s debt payments stay at home to support spending and investment by Italians.

“In Italy, the debt problem is essentially an internal question,” he said.

Italy’s progress will be decided by a mix of three factors: rising interest rates, economic growth, and the political willingness to make savings in public finances over a number of years, that is, to forgo spending on things likes schools and pensions in order to pay debt. The recent political turmoil has unnerved investors, who raised the cost for Italy to borrow on bond markets.

“Whether Italy will be able to do this politically and economically, that is the €2-trillion question,” said Dr. Wolff, referring to the size of Italy’s public debt. He believes politicians’ determination to keep public finances in check is eroding. “So I would say the picture looks grimmer than it did six months ago.”

Ultimately Dr. Wolff thinks that the disruption from leaving the euro would be so great that the government would change course.

The losses “would be so massive, people would say, no, no let’s not do that.”

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