A triumphant Greek finance minister emerged from the country’s latest bailout talks early Tuesday to announce that “white smoke” had appeared after marathon negotiations.
Yet unlike the papal election to which Euclid Tsakalotos alluded, Greece’s fate remains far from resolved.
The overnight agreement between Greece, its European lenders and the International Monetary Fund, though important, is little more than an incremental step in Athens’ effort to put its colossal debt on a sustainable footing.
Under the preliminary deal, Athens agreed to trim government spending by an additional 2 percent of GDP by cutting pensions and lowering the threshold for paying personal income tax, among other steps.
If Greece’s parliament approves the measures in the coming weeks, Eurogroup finance ministers can decide to release the next tranche of aid under Athens’ €86 billion bailout at their regular meeting May 22. Greece needs the cash to repay €7.5 billion in loans due in July.
More important is what happens next. Ever since its first bailout in 2010, Greece has engaged in an endless series of cash-for-reform talks with creditors. Though the exercise is always contentious, it has kept Greece afloat and forced significant changes to everything from tax collection to pensions to the minimum wage.
What Greece’s creditors haven’t figured out, however, is how to make Athens’ debt affordable. Greece’s more than €300 billion in debt, a whopping 179 percent of GDP, places too heavy a burden on public finances to have a realistic chance of ever being paid back.
Recognizing this, the IMF has refused to join in the current bailout until the Europeans agree to some kind of debt relief. Once this latest deal on reforms is sealed, Greece wants to begin discussions on reducing its debt burden.
“What’s important after closing the bailout review is to have a road map for debt relief,” Interior Minister Panos Skourletis said on Greek television Tuesday.
Trouble is, the parties remain far apart on how to go about it.
The institutions and eurozone member countries plan to meet on the sidelines of the G7 meeting in Bari, which is scheduled for May 11-13, where they will discuss possible debt relief measures for Greece, a person familiar with the talks told POLITICO. But Germany, for one, opposes outright debt forgiveness, arguing that the step would violate EU rules and set a dangerous precedent.
Analysts differ on whether other options — further reducing the interest rate Greece pays and extending maturities — will suffice to make the country’s debt obligations sustainable.
Much depends on how fast Greece’s battered economy grows and how much the government can save. The two questions are linked: While deep spending cuts can make it easier to pay back debt, they also depress the economy. The IMF expects Greece’s economy to grow by 2.2 percent this year and 2.7 percent in 2018.
That’s unlikely to be enough to re-energize the economy, spur job growth and lift the country out of the malaise it has been mired in since the crisis began in late 2009.
In fact, some officials worry that without stronger growth, Greece could face political instability as its austerity-weary population bristles under the prolonged measures.
Prime Minister Alexis Tsipras said last month that he wouldn’t implement the latest reform measures “unless we get a solution on debt.”
But Greece doesn’t have much leverage. Its creditors hold all the cards and Germany, which faces a general election in September, is unlikely to accept any form of debt relief until after the poll. Even then, if past experience is any guide, Berlin is unlikely to give Athens what it wants — though the POLITICO source said, “Germany will have to move if it wants the IMF on board” because it will “definitely not join if there is no agreement on debt.”
In other words, don’t be blinded by the white smoke. Greece will likely get the money it needs to service it debt this summer, but the country’s bailout dilemma is no closer to real resolution than it was before.