The quarrel between Greece and its creditors feels like it dates back to Ancient Athens itself. While the conflict has in recent months more or less continued to bubble away under the surface, it has now come back out into the open again. The creditors are complaining above all that Greece continues to delay the reforms it promised and has consistently lagged behind the schedule agreed. This applies to both the privatization plan and to the pension system, which is one of the most expensive by far in the whole OECD. The conclusion of the second ESM loan review, which has been postponed several times and is now meant to take place in March, is now increasingly at risk. If the ESM loan review is not concluded, Greece will once again be threatened by a liquidity bottleneck. The government’s coffers are chronically empty – Greece at present has financial reserves of just short of EUR 6 billion. That treasury total compares with a volume of bonds due that comes to EUR 7.4 billion by July of this year. Greece also has to transfer almost EUR 900 million to the IMF this year. Even if Greece achieves the primary surplus of 1.75% of GDP targeted for 2017, and many doubt it will, the country would still only be able to survive for a few months without the disbursement of the emergency loans.
Since many of the bond due dates fall in July, in an unfavourable scenario there is the threat of a repetition of the turgid tussle seen in 2015, when after months of negotiations a solution was found five minutes after midnight and a Grexit was averted. Some of the reasons for the escalation of the 2015 tussle no longer exist today. The Greek Syriza-led government has now been in power for about two years and has been forced to realise that creditors are only prepared to a limited extent to give in to pressure from Athens, and in political and financial terms have greater leverage. Moreover, Greek Finance Minister Tsakalotos acts in a far more cooperative way than did his predecessor Varoufakis.
However, what makes the situation potentially so explosive this year is that the government in Athens is now up with its back against the wall in terms of local politics. Electoral polls indicate that it lies well behind the conservative opposition of Nea Dimokratia. If it were then to also meet the demands of the creditors that pensions be cut, it would not only face the risk of internal split, but also a veritable Waterloo in the next election.
Elections are also to be held soon in the Netherlands, France and Germany. Above all the German Federal government faces a dilemma. On the one hand, it cannot afford domestically to show Greece benevolence, as this could send voters flocking to the right-wing populist AfD, yet on the other hand Chancellor Merkel would likewise wish to avoid a further Grexit showdown toward July and thus in the hot phase of her own election campaign.
As if the struggle between Greece and its creditors were not long enough and politically wearying as it is, the dispute between the EMU member states and the IMF on the matter of Greece continues unabated. Since the IMF did not participate in the third assistance package it has at regular intervals repeated its concerns that Greece’s debts are not viable in the long term. The IMF says it will only participate in the financial assistance that the Federal government expressly wants if debt relief is provided, something several EMU member states, with Germany among them, continue to reject. Above all, the IMF believes that the demand by the other creditors that Greece achieve a permanent high primary surplus of 3.5% of GDP in 2018 and thereafter, a key premise for debt to fall in the long term, is unrealistic.
However many facets there now are to the Greek saga, little speaks in favour of the Gordian knot soon being cut. Durable longer-term solutions would call for political compromise on the one or the other side. Since there are few signs of this on the part of either the creditors or the Greek government, and yet neither side has any interest in a further escalation of the conflict, much would indicate that the tough tussle with minor political concessions will go on. The Greek case is therefore likely to flare up again in the future at regular intervals.