Politico EU: Greek debt drama’s coming to a close (well, maybe)

After seven years of crisis, Greece may finally be ready to turn the page on the eurozone’s darkest chapter.

Economic activity is poised to pick up and among Greek policymakers and businessmen, a new sense of optimism is emerging. But Athens and its creditors must still tie up loose ends in the country’s €86 billion bailout program at the Eurogroup meeting on May 22. For the Greek economy, any last-minute plot twists mean its nightmare will continue.

“The Greek economy is at a turning point,” Yannis Stournaras, head of the Greek central bank, told POLITICO in an interview. “I am more optimistic now, but … cautiously optimistic, given the mistakes that have often been made in the past both by the Greek side and by Greece’s creditors.”

Greece was at a similar tipping point in 2014, when the economy had returned to growth and the country successfully tapped bond markets to raise funds. But the green shoots withered quickly, when Yanis Varoufakis entered the stage as finance minister to play political poker with the creditors and lost spectacularly in July 2015.

Ahead of next week’s eurozone ministerial gathering in Brussels, the Greek parliament on Thursday will vote on the latest set of reform measures that will clear the way for the conclusion of the creditors’ “second review” of the bailout package. The Greeks hope that this will then pave the way for an agreement on debt relief and more fiscal leeway, at last putting the country on a path to normality — even as transport workers, doctors, and civil servants opposed to further austerity went on a nationwide strike on Wednesday.

But while Greece has delivered on all its targets thus far, creditors keep bickering over more substantial debt relief. Germany, the biggest creditor to Athens, has steadfastly opposed it, while the International Monetary Fund has insisted on it and threatened to walk away. Yet the German parliament wants the IMF to stay on board for Berlin’s continued participation in the bailout.

Last week, Greek Prime Minister Alexis Tsipras said Greece is “closer than ever” to reaching a deal on debt relief. “The solution has to do mainly with our lenders’ clear obligation. Τhe ball is no longer in our court.”

A few days later, Greece’s creditors discussed the matter on the sidelines of the G7 meeting of finance ministers and central bankers in Italy. But IMF Managing Director Christine Lagarde, European Central Bank President Mario Draghi, Eurogroup President Jeroen Dijsselbloem, and German Finance Minister Wolfgang Schäuble could not break the deadlock. One problem: Upcoming elections in Germany and Austria, where far-right gains are feared, make any additional concessions to Greece politically tricky.

All conditions in place

The uncertainty is the last thing Greece needs right now, said Elias Kikilias, head of research at the National Center for Social Research. “If the political leadership in Greece, as well as the creditors, will offer a period of steadiness, then all conditions are in place for the Greek economy to growth 2 to 3 percent a year in the years ahead.”

Time and again, political uncertainty has held back Greece’s economic recovery. The latest delay in bailout talks prompted the European Commission to make a sharp downward revision in its growth projections for this year to 2.1 percent from 2.7 percent previously. The Greek government has cut them deeper, to 1.8 percent. And its first quarter GDP figure, released earlier this week, showed the economy contracting 0.1 percent from the previous quarter.

Still, economic activity is expected to expand at the fastest clip in years in 2017.

“Greece is changing pace,” said a senior government official, noting that foreign investors had been knocking on his door since the third quarter of last year. “I can see a huge upside here.”

Importantly, banks say they are in a much stronger position to extend loans to businesses and consumers. “It will not be banks holding back the recovery,” Panagiotis Roumeliotis, chairman of Attica Bank, Greece’s fifth-largest bank, said — although Moody’s has stressed that any improvement in the Greek banking sector is closely tied to the bailout program proceeding smoothly.

Ousting Syriza

The main opposition party, New Democracy, is less sure about the near-term prospects for the Greek economy. Its head, Kyriakos Mitsotakis, said the significant upside potential for growth will be realized only if debt talks proceed smoothly and if voters oust the ruling Syriza party from power.

“The current government is meeting creditors’ target by raising taxes and cutting spending,” Mitsotakis told POLITICO. “This hampers growth, does not solve fundamental problems, and will merely kick the can down the road.”

With polls currently pointing to a New Democracy win in next Greek elections, due 2019 at the latest, Mitsotakis expressed optimism that aggressive reform efforts he plans to launch would pave the way for creditors to ease primary surplus targets of 3.5 percent of GDP, if and once he assumes power. Then, tax cuts will spur entrepreneurship and growth, he argued.

Indeed, drained by years of austerity and high unemployment levels, many Greeks don’t share the sense of optimism. They are still in full survival mode and focused on making ends meet, too tired to protest against the government. Unemployment has come down from its 2013 peak of around 28 percent, but it’s still hovering at 23 percent.

Pro-eurozone consensus

The greatest threat to current improvements remains politics — domestic, as well as European. Despite significant improvements over the years, the relationship between the Syriza government and its EU creditors is one of mistrust.

According to a well-connected journalist, Tsipras has transformed himself from a populist rabble-rouser into a responsible leader. Stournaras, the central banker, also said he is confident that the government “has changed a lot since July 2015,” laying the foundation for sustainable growth.

Mitsotakis has a less favorable view: “Tsipras is a hard-leftist, he is a populist, he will not suddenly turn pro-business and pro-reform.” But if his party governs Greece, he argued that there would be “no political risks down the line” and that the country would offer a good investment opportunity.

Regardless of party politics, Stournaras — who served as finance minister under a New Democracy government in 2012-2014 — suggested that the creditors should look at the broader political transformation of his country and seal the bailout deal, as well as provide a roadmap for debt relief.

“There is a strong political consensus now for remaining in the eurozone,” he said. “The large majority of the political parties in Greece, not only are they pro-euro, but they have voted in parliament appropriate measures to keep Greece in the eurozone as well. … There is less room for populism now.”

Source: Politico EU