With the summer nearly over and Europe returning to normal political activity, Athens will resume talks with the European Union and the International Monetary Fund to receive some kind of debt relief. Greek officials will meet with members of the troika (the European Central Bank, European Commission and the International Monetary Fund) in Paris on Sept. 2. Troika inspectors will then visit Greece by the end of September, marking the beginning of a long negotiation between Athens and its international lenders.
Greece's Many Debts
Greece's current debt is equal to roughly 315 billion euros ($416 billion), or about 174 percent of gross domestic product — the highest ratio in the European Union. Greece received two international aid packages, one in 2010 and one in 2012, and the troika required that the government apply substantial reforms in return. The goal at the time was to progressively reduce Greece's debt burden while introducing reforms to resurrect the country's moribund economy. According to this plan, Greece's debt was supposed to decline to 124 percent of gross domestic product by 2020 and drop below 110 percent by 2022.
However, it has become clear to both European authorities and the International Monetary Fund that Greece probably will not reach these targets. In 2012, Athens went through the biggest sovereign debt restructuring in history. The Greek government also raised taxes, cut spending and fired thousands of public workers. But Greek debt remains extremely high, particularly considering that the country has been in recession since 2009 and has little hope of "growing out of" its debt.
In parallel, Greece also suffers from unpaid private debt, which is believed to have reached some 160 billion euros, roughly 88 percent of the country's GDP. It consists mainly of nonperforming loans in Greek banks but also includes unpaid taxes and unpaid social security contributions. During the summer, Greek authorities discussed plans to address this issue, and measures will probably be announced before the end of the year. According to Greek media, the new measures, focusing on out-of-court mechanisms instead of debt write-downs, will likely be applied to companies first and households later.
Greece's growth in nonperforming loans (over one-third of bank loans are not being serviced) is again the consequence of the country's six years of recession, during which time unemployment skyrocketed and economic activity collapsed. Any real recovery in the Greek economy will require banks to resume lending to companies and households. In recent weeks, Greek banks have denied reports that the sector will need a new round of increased capital support after the European Central Bank finishes its stress tests on EU banks in late October. However, the large stock of bad loans will continue to weaken Greece's banking sector for years to come.
A Possibility for Compromise
While Greece would like to receive another debt markdown, this is unlikely. EU governments, EU institutions and the International Monetary Fund hold over two-thirds of Greek debt and none are willing to accept further losses. In response, Athens' contingency plan is to demand lower interest rates and longer maturities for its existing debt. The Greek Loan Facility's loans amount to 53 billion euros and have an average maturity of 17 years. The roughly 140 billion euros Greece has received from the European Financial Stability Facility have an average maturity of 30 years. Athens would like to extend the maturity of both loans — ideally to 50 years — to reduce the size of its yearly debt payments. Greece's interest rates are currently linked to the Euro Interbank Offered Rate, or Euribor, and Athens would like to switch to a fixed interest rate, again ensuring lower repayments.
Athens expects this because of an EU promise made in 2012 to analyze additional ways of reducing Greek debt if the country met its fiscal targets. In the first half of 2014, Athens achieved a primary surplus of 1.8 billion euros after achieving a 2013 primary surplus of 1.5 billion euros. Greece also returned to financial markets to seek the issuance of small amounts of debt, and it will see timid economic growth in 2014 for the first time in six years. For all of Greece's limited success, however, the problem remains that Brussels would rather link relief efforts to additional conditions — reforms that would be politically difficult for the Greek government to implement.
At the moment, Athens' domestic political situation is complex. In February, the Greek Parliament will have to appoint a new president, which requires 180 votes — a three-fifths majority — in Parliament. But the ruling center-left and center-right coalition controls only 153 seats, forcing the government to choose between making concessions to smaller parties or calling early elections to secure a larger majority. Considering Greece's extremely fragmented political environment, the outcome of early elections is uncertain. In 2012, it took the Greeks two rounds of elections to form a governing majority.
This explains why Athens will resist EU pressure to apply significant austerity measures: The Greek leadership needs to avoid social unrest and delay elections as long as possible. Greece does not need to hold general elections until mid-2016, and the Greek government will try to keep itself intact until that time. Anti-establishment parties, such as the Syriza party and, to a lesser extent, the far-right Golden Dawn party, have also grown in popularity because of the crisis, further complicating the political process.
Both Athens and Brussels have an interest in delaying new Greek elections for as long as possible, making a compromise on Greece's debt highly likely. Even if the European Union and the International Monetary Fund ask Greece for additional reforms, Greece's lenders will be flexible enough to reach a deal with Athens. Ultimately, neither side wants new tensions at a time when Greece is finally seeing some degree of political and economic stability, making compromise on Greek debt all the more likely.
