Despite a debt level which is almost unsustainable, the Greek government has switched to more offensive management of public finances. The government in Athens promised the country’s pensioners a one-off lump-sum bonus payment of up to EUR 800.00 for Christmas, after establishing that public finances are set to be on budget. As is to be expected, the Eurogroup responded to the announcement with harsh criticism. On 5 December 2016, the finance ministers of the Eurogroup had agreed to offer Greece a conversion of the country’s loan interest obligations from variable to fixed rate and to increase the average weighted time to maturity of EFSF liabilities marginally from currently 31.1 to 32.5 years.
For Greece and the Greek government, the situation now is critical. Since Tsipras has already publicly promised the one-off pension payment, he will not be able to retract if he is to save face politically. At the same time, much is at stake for Greece’s public finances. If the loan interest rate is not fixed, the country will face higher interest charges in the event that the general EMU yield level were to rise in the coming year. The way out for Greece from the current situation is to make alternative proposals as part of a compromise with creditors – proposals which seem sufficiently plausible for the country to achieve its savings and reform targets for this and the coming year.
If no compromise is found with creditors and/or domestic pressure on the government increases, Tsipras may take flight to the future and call for new elections. Yields on Greek government bonds, which had decreased in November in the hope of debt service relief, are now rising again.