Athens Dodges Default, Again
By: Analysis | Stratfor.comMay 26, 2016

Editor's Note: Financial, political and social uncertainty has forced Greece's ruling Syriza party to cut a deal with the European Union — despite its campaign promises against it — to keep the economy afloat. Additional measures will generate more political discord, if not violence, throughout the country. The influx of migrants has only aggravated the problem. Below is a routinely updated chronicle of the most recent developments. The following piece provides updates to this crisis in real time.

May 25: Athens Dodges Default, Again

The Greek crisis has been a saga of lengthy EU summits that end in difficult compromises. The latest of these meetings, which came to a close early May 25 after over 11 hours of talks among eurozone finance ministers, was no exception. Greece and its creditors reached an understanding that will temporarily forestall a Greek default, providing Athens with the money it needs to function for the next few months. More important, though, Athens' lenders promised it debt relief, a success for the ruling Syriza party. However, parts of the agreement are vague, and several of its most critical elements will not be implemented any time soon.

In the meantime, Greece will receive 10.3 billion euros (nearly $11.5 billion) in bailout funds over the coming months, starting with a tranche of 7.5 billion euros in June. The amount will be enough to enable Athens to make its debt payments in June and July, avoiding a default in the immediate future. It will also buy the Greek government some time. Since the country's debt bills become more manageable after July, Athens' lenders have guaranteed that Greece will neither default nor exit the eurozone for the rest of the year.

But the impact of the deal will also reach beyond 2016. Greece's lenders have pledged to provide Athens with debt relief, and though the details of this promise have yet to be made clear, the Eurogroup has agreed to assess the country's debt sustainability. It will also look for ways to keep Greece's annual debt servicing needs at less than 15 percent of the country's gross domestic product until 2030, and below 20 percent after that. Granting Greece lower interest rates, repaying profits on the Greek debt held by the European Central Bank, and using bailout funds to buy more expensive International Monetary Fund loans were discussed at the latest meeting as well. However, most of these opportunities will only become available to Greece after its current bailout program ends in mid-2018.

These conditions will give Greek Prime Minister Alexis Tsipras something to work with at home. He has continually assured voters that the painful austerity measures passed by the parliament in recent months were a necessary precondition for debt relief. While the May 25 agreement will not completely eliminate social unrest or dissent within the ruling party, it will give Tsipras room to frame the deal as a step in the right direction.

Germany will be able to use the agreement to its advantage as well. Because Berlin opposes new debt write-downs for Greece, a promise to eventually lower interest rates and extend repayment periods is an acceptable compromise for the German government. Delaying concrete moves toward debt relief until after mid-2018 also gives German Chancellor Angela Merkel's administration a chance to backburner the thorny issue until Germany's general elections conclude in late 2017.

The IMF's new role in Greece's bailout program suits Berlin's interests well, too. In the past, the IMF has refused to participate in any bailout program that does not include debt relief, a stance that puts it in direct conflict with Germany. A few days before the May 25 meeting, the IMF even demanded "up front" and "unconditional" debt relief for Athens. The Eurogroup's decision to provide Greece with debt relief was a concession to the organization, although postponing its implementation suggests Northern European countries (including Germany) were able to pressure the IMF to relent on its timeline for such aid. After the Eurogroup summit concluded, the IMF suggested it could join the Greek bailout program by the end of the year.

Greece has been given another reprieve, but that does not mean its problems are over. Between now and mid-2018, Athens is still expected to introduce spending cuts and economic reforms, which will continue to fuel instability in the country. The promise of eventual debt relief will not make life easier for the millions of Greeks who suffer the effects of their economy's lingering malaise. Meanwhile, the threat of financial and political volatility spreading elsewhere in the eurozone, including Spain, Portugal, Italy and the United Kingdom, continues to hang over Greece.

This is not the first time the European Union has promised to ease Greece's debt burden, and there is no guarantee that cooperation between the two will hold. The bloc made a similar deal with the Greek government in late 2011, but a change in Greece's political environment soured the relationship. A comparable turnover in leadership, whether in Greece or in Northern Europe, could disrupt the relationship once again. After all, Germany and France will hold general elections in 2017, and conservative and Euroskeptic forces are likely to make substantial gains in both countries. Two years is a long time in Europe's ever-evolving crisis, long enough that promises made today could easily be forgotten in the future.

April 22: Greece's Creditors Look for More Assurances

Greece and its creditors made progress in negotiations to implement the country's bailout package during an April 22 meeting of eurozone finance ministers. According to the president of the Eurogroup, Jeroen Dijsselbloem, Athens and its lenders are close to reaching an agreement on two important aspects of the deal: what reforms Greece must implement, and what extra steps Athens must take if it fails to meet its fiscal targets by 2018. Negotiators want to settle both issues before Greece receives its next tranche of aid, so recent progress is a good sign for Athens. It indicates that the International Monetary Fund and European financial and political institutions, which have been at odds over the terms of implementing the bailout, are looking to overcome their differences. But achieving consensus may require promises from Greece that it will implement additional austerity measures if necessary — a provision that some Greek lawmakers will resist.

The European Commission, European Central Bank, European Stability Mechanism and IMF differ on whether Greece can achieve its primary surplus target of 3.5 percent of gross domestic product in 2018. On April 21, the commission announced that Greece recorded a primary surplus of 0.7 percent of GDP in 2015, which shows Athens is still far from its goal. The IMF believes the European Union is too optimistic. It insists Athens will have to make more spending cuts and receive some debt relief to have any chance of meeting its goal. Given this uncertainty, negotiators are looking to put contingency measures in place to reassure creditors that Greece will introduce additional reforms if it fails to meet its primary surplus target. According to Dijsselbloem, those extra measures aim to generate additional savings worth 2 percent of Greece's GDP.

While requiring extra steps to cut Greek spending will help the IMF and European Union bridge their differences, they will be contentious in Greece. The Greek government has a majority in Parliament by only three seats; a small rebellion among lawmakers would be enough to make it collapse. Introducing austerity measures that are not included in the current bailout program may trigger such a rebellion, which is where debt relief becomes important. Greek Prime Minister Alexis Tsipras has told voters that Greece will have to accept some austerity measures in exchange for some form of relief for its massive debt, which currently stands at around 177 percent of GDP. Meanwhile, the Eurogroup seems focused on the austerity measures for now. Though according to Dijsselbloem, negotiators are discussing potential debt relief, those conversations are still in their early stages.

Debt relief is controversial for Greece's lenders. The IMF insists that Greece's debt is unsustainable, but Berlin wants to delay a negotiation on the issue for as long as possible, since concessions for Greece tend to be difficult to accept for some German conservative lawmakers. While a debt write-down is not in the agenda, Greece's creditors may eventually give it a grace period for repayment, longer maturities and lower interest rates.

Should Greece fail to achieve a 3.5 percent surplus in 2018, creditors fear Athens may not honor its promise to enforce the new, politically unpopular austerity measures. As a result, they want those measures to be written into Greek law now. But Greek Finance Minister Euclid Tsakalotos has said Greek law does not allow Parliament to legislate on events that may or may not happen in the future. Instead, Athens will probably ask for stronger Eurogroup commitments to debt relief before it makes promises to enact more austerity measures if needed. In his April 22 announcement, Dijsselbloem said another Eurogroup meeting may take place April 28; the short timeline suggests that Athens and its creditors are close to a deal but intense negotiations are still taking place. In the end, Greece will receive the next tranche of bailout money and avoid a default, but the much-hoped-for debt relief may not even make it onto the table.

April 12: Bailout Talks Stall Over Demands for Reform

Greek leaders on April 12 suspended negotiations with the International Monetary Fund (IMF) and the European Union over Greece's third tranche of bailout funds, saying IMF demands for more financial reforms are keeping Greece and its creditors from reaching a deal. IMF Managing Director Christine Lagarde insisted that before Greece receives any more funding, it needs to make more of an effort to make its budget sustainable. Greece must conclude the first bailout review before it can start talks on debt relief, which the Greek government needs in order to maintain public and parliamentary support.

Greek Finance Minister Euclid Tsakalotos said leaders still aim to finish the review by April 22, before the next Eurogroup meeting. Negotiators still have to reach an agreement on a number of issues, however, including pension reform and managing the rising number of Greek nonperforming loans. Talks may continue into May.

The deadline for Greece to repay its loan of 2.3 billion euros ($2.6 billion) is not until July, but a heightened sense of urgency has permeated the talks for the past two weeks. European leaders may be eager to conclude negotiations before the British referendum on EU membership on June 23; any drama surrounding the Greek bailout talks could sway the British vote. The IMF will be willing to support a quick resolution to avoid a Brexit, but it is less motivated than the Europeans are, and Greece is even less concerned about the British referendum. Brussels' relative impatience to reach a deal may put it at a slight disadvantage in negotiations. Still, with its payment deadline approaching, Greece has its own reasons for wanting to resolve talks sooner rather than later. The bailout review talks will recommence on April 18.

April 5: A Tussle at the Negotiating Table Over the Greek Bailout

As talks over Greece's bailout program continue, a spokesman for German Finance Minister Wolfgang Schaeuble said debt relief for Greece is not currently on the table. Officials from the European Commission, the European Central Bank and the International Monetary Fund (IMF) convened in Athens on April 4. According to the spokesman, Athens must first focus on creating a sustainable budget and returning to financial markets. This happened after the IMF and the Greek government entered a dispute over a leaked conversation between IMF officials discussing ways to pressure Athens and its creditors to reach a deal.
 
Considering that Greece does not owe significant debt payments until July, Athens and its creditors still believe they have time to defend their positions, allowing negotiators debating the next tranche of bailout money to Athens to wrangle over debt relief and economic reforms. This means that in the coming weeks, threats and rumors are likely to continue before a bailout deal is reached. Debt relief, however, is likely to be postponed again.
 
The debt relief question is important to the IMF, which wants it included in the bailout package. Although Greece would welcome debt relief, the country would just as soon cut the IMF out of the picture to avoid the strict structural reforms the financial institution requests. Germany, in the meantime, wants to keep the IMF involved in the Greek bailout, in keeping with demands from conservative lawmakers. But Berlin thinks that granting debt relief to Greece would be unpopular at home, which explains the comments by Schaeuble's spokesman.
 
In the short term, the German government wants Greece to get the next slice of bailout money and to have a stable and cooperative government in Athens to deal with the flow of refugees arriving in the European Union from conflict-torn areas in the Middle East. The main program designed to mitigate that flow by returning illegal migrants to Turkey began on April 4, when about 200 people left Greece. But the sustainability of the EU-Turkey agreement is uncertain. It could still be declared illegal, and some EU members will resist the redistribution of migrants among member states. More important, Turkey could stop cooperating if the European Union drags its feet on issues such as visa liberalization and accession talks.
 
Although reports indicate that the number of migrants making the journey to Greece has slowed, the office of the United Nations High Commissioner for Refugees, the body's refugee agency, reported that 228 illegal migrants reached Greek shores on April 4. In addition, better weather conditions in the Mediterranean have led to more people using the Central Mediterranean migration route, which connects North Africa with southern Italy. As a result, Austrian authorities are threatening to increase controls at the border with Italy, which will create new political frictions in Europe. 

Feb. 16: The Role Refugees Play in the Greek Crisis

The Greek government is once again fighting on multiple political and economic fronts. Athens is negotiating the continuity of the bailout program while also pushing to avoid its suspension from the passport-free Schengen area. At the national level, the government of Prime Minister Alexis Tsipras is trying to prevent a rebellion within the ruling Syriza party while coping with growing domestic unrest.

Negotiations with the European Union and the International Monetary Fund temporarily ended earlier this month at an impasse. They will begin again in late February, and pension reform will likely still be the most contentious topic under debate. Both Athens and its creditors agree that Greece needs to save around 1.8 billion euros (roughly $2 billion) this year, but they disagree on how to accomplish that. While Tsipras' government is proposing to increase social security contributions for companies and workers and to introduce cuts in some auxiliary pensions, the creditors want a generalized cut in current pensions. Greece spends roughly 17 percent of its gross domestic product on pensions, more than any other EU member. But Tsipras believes that additional cuts will undermine one of the country's last safety nets, one upon which hundreds of thousands of Greek households depend.

Judging by their statements that the negotiations will last weeks, the creditors seem relaxed. Not so Athens, which is slowly running out of time and money. Greek officials recently said Athens has enough resources to continue functioning without aid until at the latest June. And though Greece's debt maturity calendar is not as pressing as it was in 2015, Athens must still repay approximately 2.3 billion euros to the European Central Bank in July. Though the payment pales in comparison to the roughly 7 billion euros in debt maturities Athens faced from July to August last year, Athens could nevertheless struggle to make it if it does not receive the next tranche of its bailout. Once the July payment is made, Greece does not need to make any substantial debt payments for the rest of the year, which dramatically reduces the chance of a default or a Grexit.

The EU Scapegoat

But Athens has other, more urgent problems to deal with. On Feb. 12, the European Union gave Greece three months to present and implement plans to cope with the refugee crisis or be suspended from Schengen. In recent weeks, Athens has shown Northern Europe it is willing to cooperate. It put the Greek Defense Ministry in charge of coordinating the handling of asylum seekers, announced the construction of reception centers in Athens and at the main entry points used by migrants (the islands of Lesbos, Chios, Leros and Samos), and agreed to cooperate with Turkey on patrols of the Aegean Sea under NATO supervision.

But this has not been enough to convince some Central and Eastern European countries that Greece has good intentions. On Feb. 15, members of the Visegrad Group (Poland, Hungary, the Czech Republic and Slovakia) met with representatives of Macedonia and Bulgaria to discuss measures to isolate Greece. Given that the European Union is failing to cohesively respond to the migration crisis, countries and groups of countries have decided to take regional and bilateral measures to sever the Balkan migration route that connects Greece to Austria and Germany. In addition to building fences and introducing quotas on the number of migrants allowed to enter their territories, these countries are also helping Greece's neighbors enhance their border controls.

And if the European Union decides by the May deadline that Greece is not doing enough to protect its borders, Brussels could allow Schengen members to introduce border controls in the area for up to two years, a notable increase from the current limit of six months. On the surface, the idea is to "isolate" Greece. But Greece does not share land borders with any Schengen members, which means that Athens' failure to protect its borders would mostly be used as a justification for other Schengen members to reintroduce border controls with their neighbors.

Tsipras is on a diplomatic mission to repair the image of his country. He met Feb. 14 with Dutch Minister of Foreign Affairs Bert Koenders. Tsipras also met with European Council President Donald Tusk on Feb. 16, and will meet with European Commission chief Jean-Claude Juncker on Feb. 17. His goal is to secure support from EU institutions during a summit of the bloc's heads of government Feb. 18-19. During the summit, Tsipras will hold bilateral talks with German Chancellor Angela Merkel and French President Francois Hollande.

Tighter border controls along the Balkan route will create problems for Greece, since migrants will have a harder time moving north. But most asylum seekers do not want to stay in Greece, prompting them to seek alternate routes. Albania is a likely option. Migrants could either try to cross the southwestern Balkan country to reach Montenegro, Bosnia and Croatia, or use the Adriatic Sea crossing to reach Italy. A growing bottleneck in the Western Balkans could also reactivate the central Mediterranean route, which connects North Africa to southern Italy.

Domestic Discontent

EU leaders are not the only ones upset by the refugee crisis. Many Greeks fear the economic and cultural impact of the massive arrival of asylum seekers, and in recent weeks there have been protests and vandalism at reception centers under construction. The influx of asylum seekers is expected to grow as weather conditions improve, as are attacks against migrants and clashes between anti-immigration groups and the Greek police.

EU threats to suspend Greece's membership in Schengen will probably weaken popular support for the bailout. The program is already controversial, with farmers having blocked roads for weeks nationwide to protest the pension reform and the plans to lift subsidies for the agricultural sector. In the coming days, courts, ferry boats and schools will be shut down by strikes. Still, protests have become a common feature of Greek politics since the beginning of the crisis, and Tsipras is not the first prime minister to contend with multiple strikes and protests.

The main challenge to the Greek government comes from within. The ruling coalition rules with a majority of just three seats in parliament. Even a small rebellion in the government's constituent parties would cause the government to fall. This explains why Tsipras frequently reaches out to small parties on the center and the center-left. He wants to show his own lawmakers that he has options in case of a rebellion and also ensure that he could remain in power should some abandon him.

Greece's domestic and foreign problems are deeply intertwined. There should be an agreement of pension reform in the coming weeks because Athens' progressively weakening financial situation will make it more willing to make concessions to the creditors, though the relief the agreement provides will be temporary. The migration issue will not go away so easily. Border controls along the Balkan route are likely to remain in place, regardless of what is decided in Brussels about the future of Schengen. Countries will also continue to introduce measures to become less attractive to migrants. But with the crisis in Syria still far from over, migrants are likely to simply look for new ways to reach Northern Europe. The key month to watch is May, when a formal suspension from the Schengen Agreement could trigger a political crisis in Greece that could derail the continuity of the bailout program.

This article originally appeared on Stratfor.com
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