Greece: A new chapter in the crisis odyssey begins

History is being written today! After a crisis odyssey lasting around eight years, Greece is leaving the EMU creditors’ third and final bailout programme. With immediate effect Hellas is financially standing on its own two feet again. The Syriza Administration is refusing any form of further aid measures on the part of the creditors; after all, a year before the parliamentary elections it can symbolically sell the independence that has been regained as a political triumph. And indeed, superficially there has been some success: The economy is on the road to at least moderate recovery and the Greek government can occasionally reveal fat budget surpluses before interest payments. At the same time, the liquidity requirements for government liabilities are secured until the end of 2019, and further debt service relief in the past few months by the EMU creditors guarantees the debt sustainability for the foreseeable future – as the IMF certifies. But does this mean that the Greek saga of misfortune can be shelved once and for all? Will Greece now be able to stand on its own two feet again in the long term, such that the country’s euro neighbours can be glad of a terrible end?

In the long term it will probably remain difficult for Hellas to preserve the fiscal independence it has regained. For decades the country will have to maintain strict budgetary discipline, and the economy continually grow, which is hardly a realistic goal. The announced debt service relief, which slightly lowers the current value of the liabilities, will probably not be sufficient for long-term debt sustainability. Nor are the new conditions likely to stop new Greek governments easing the reform course of the past few years. Domestic pressure is simply too great given looming social unrest, forthcoming elections and, not least of all, the disastrous forest fires, after which the government does not wish to be accused of being inactive.

Furthermore, possible setbacks, which might be due to exogenous shocks, could undermine the debt reduction process. The most recent crises in Italy and Turkey have shown how susceptible Greece’s capital market (activity) remains to events outside its sphere of influence and how liquidity shortages could loom, at least after 2019. At the same time, relatively expensive refinancing on the primary market could further diminish the prospect of long-term debt sustainability and ultimately force Greece back into the arms of the EMU creditors. The Eurozone would then be faced with a choice: a new bailout programme or further debt service relief for the ‘problem child’. In view of this, the heads of government of the Eurozone countries should be aware that today merely marked the end of one chapter in the Greek crisis odyssey; it is unlikely to be the last.

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