Renewed Greek bailout talks imply Europe-wide ramifications

Renewed Greek bailout talks imply Europe-wide ramifications

The next review of the Greek bailout agreement will be pivotal for Syriza and the European Union. Participation of the IMF is at risk, and with it the prospect of debt relief for Athens.

Athens is hoping to finish the review of Greece’s third tranche of bailout funds by April 22, before Eurozone finance ministers meet again. A successful review would prompt the release of €5bn of fresh money for the Syriza-led government, enough to cover €3.5bn worth of debt payments in July.

Greek debt due in 2016

The Wall Street Journal

Until then, both Greek officials and their European counterparts will bargain for getting their own interests maximised in a future deal. The main question, though, is not whether a deal will be cut, but rather if the IMF will take part in it. The international creditor has not signed up in the third bailout yet, and its relationship with Athens is rocky.

Events the past few weeks – including a  transcript of an internal IMF teleconference detailing the option of opting out of the rescue if Germany opposes debt relief – contribute to making a quick deal difficult, and have put the EU in a tight spot as the Brexit referendum in Britain looms.

The status of reforms

Since last year’s bailout deal, the Greek government has received about €16bn out of the promised €86bn from its European creditors. The reason being that Athens has not passed its first bailout review yet, which was initially planned for October 2015, but dragged on, as Greece failed to implement reforms. Among these is a reform of the pension system, an increase of income taxes, and improved tax collection in order to achieve a 3.5% primary surplus by 2018.

Although the government has given some proofs of good will on opening privatization programs and increasing taxes on farming, Brussels expect more effort. The main contention point concerns the reform of the pension system (pensions are worth 17% of national GDP), which is considered essential if the country is to meet its target.

But reforming the pension system is a controversial matter for the government in Athens, since Greeks rely heavily on pensions, with a quarter of the workforce unemployed and half of Greek youth jobless.

IMF: Brussels budget surplus target for Greece is wishful thinking

The pensions issue triggered a set of criticisms from the IMF pertaining to the deal passed between Athens and Brussels last summer. The international fund considers Brussels’ target of a 3,5% surplus utopian, and worry that it would require “heroic efforts” by the Greek people. Further, the IMF doubts the reforms on the table actually produce the target — according to the latest forecast, Greece is on track for a 1% deficit in 2018.

Moreover, the IMF has criticized the German position over the possibility of debt relief, premising its participation in the latest rescue deal on opening negotiations to restructure Greek debt to longer maturities and lower interest rates.

Overall, the IMF’s line is a stick-and-carrot approach, promising debt relief in exchange for substantial efforts by the Greek government. Germany so far refuses debt relief, but maintains that it needs the IMF to participate in the bailout with its tough terms on reforms.

Greek PM Tspiras claims that if he successfully passes this bailout review, he will obtain debt relief. But his outspoken challenges to the IMF’s insistence on difficult reforms is feeding the Greek antipathy towards the international lender.

Pressure on Tsipras is mounting

By alienating his most influential backer for debt relief, Tsipras is simultaneously managing pressure at home and playing hard-ball in negotiations in the hope of obtaining support from France and benefiting from the European agenda.

Tsipras is facing social unrest following the tax hike on farmers and his government’s pending implementation with privatization programs in the months ahead. A reform of the pension system would also leads to protests, as well as profoundly damage Syriza’s public support, since growing poverty in the country is perceived as a direct consequence of the very same austerity the party claimed to oppose.

greece econ indicators

Eurostat

Therefore, by challenging the IMF, Tsipras and the government strengthens Syriza’s image as fighting for the people and for the best terms possible. Tsipras is already losing his lead in opinion polls with the recent return of New Democracy – the center-right party that governed during most of the debt crisis – as a political contender: It limits his options, since calling for new elections to gain a new round of legitimacy as in September after a rebellion within his coalition is too risky at this point.

Tsipras’ majority in the Hellenic parliament is very slim, consisting of only 3 seats. Thereby, he is under pressure to reach a deal quickly with Brussels and open debt relief talks if he is to avoid being forced out of power.

The Greek leader has started touring European capitals in hope of securing the backing of influential member states such as France, which was instrumental in the run-up to a deal last summer.

The agreement between the EU and Turkey softened Athens’ argument regarding the cost of handling the refugee inflow, and thus the need for lowering surplus targets. Meanwhile, the refugee agreement is not set in stone; it could be challenged in courts, or Turkey could stop implementing it, if it deems that talks on visa liberalization are stalling, or the opening of EU accession chapters is not advancing. Merkel’s decision to open an investigation into TV satirist Jan Böhmermann – who published an insulting video of Erdogan – is a way to save the deal for now.

An early deal could send a signal of stability to British voters

Tsipras will have to strike the right balance between pleasing international creditors and keeping his parliament under control at home in order to avoid a backlash. Payments are approaching in July, and he will need a deal by then. However, the EU has a more urging deadline to consider.

In Brussels, the Brexit vote on 23 June will prompt leaders to seek a deal earlier rather than later, hoping to send British voters a testimony of stability in the Eurozone, or at least to avoid another signal that the continental union is on the verge of crisis.

As a result, the strategic game between Greece and its creditors will not result in the same slippery slope that threatened to throw the EU in deep crisis last summer. However, Greece remains one of Europe’s headaches in the years to come.

Categories: Europe, Politics

About Author

Julien Freund

Julien is an analyst with a focus on Europe. He has worked as a lobbyist in Paris and Brussels and has written extensively on the rise of nationalist parties. He holds two master’s degrees in geopolitics and international relations and in European relations, and received his BA in economics and social sciences from the Catholic Institute of Paris.