Houston, Texas, USA : Greece has successfully completed its final three-year installment of an international bailout program, allowing it to reclaim a degree of control over its finances, which have been overseen since 2010 by the European Union, European Central Bank and International Monetary Fund.
The bailouts from the International Monetary Fund, the European Central Bank and the European Commission came at a huge cost that will still be felt for years to come.
Athens exits its third bailout on Monday after a protracted debt crisis that forced it to implement painful austerity measures — including deep cuts to social welfare programs — to receive emergency loans.
“Today we can safely conclude the [European Stability Mechanism] program with no more follow-up rescue programs as, for the first time since early 2010, Greece can stand on its own feet,” Mário Centeno, the chairman of the ESM’s board of governors, said in a statement reported by Reuters.
“This was possible thanks to the extraordinary effort of the Greek people, the good cooperation with the current Greek government and the support of European partners through loans and debt relief,” he said.
The ESM has disbursed 61.9 billion euros over three years in support of macroeconomic adjustment and bank recapitalisation. A further 24.1 billion euros that was available to Athens under the programme was not needed, the fund said.
However, the European Commission will continue to closely monitor Greece’s finances in order to ensure that Athens does not backslide.
“A new day is dawning in our country,” Prime Minister Alexis Tsipras said on Tuesday during a state address from the island of Ithaca, after Greece exited the memoranda.
“Today is the beginning of a new era,” he said adding that the country has regained its sovereignty to determine its own future. We have reached our destination, we have come out of the memoranda, but we will not stop here. New battles are now ahead of us,” Tsipras said and added: “Now that we have reached our destination, we have the strength to make our place as it deserves to be.”
Tsipras stressed that this is the beginning of a new era, but as he stated “we will not ignore the lessons of history.” “We will not let oblivion drift us,” he added.
Moreover, he said: “We will never forget the causes and the people that led the country to the memoranda. Because these are the supplies of a country that is writing a new page in its history.”
“Based on our vision and determination, a new era for Greece begins. We must not go back to Greece of deficits and bankruptcy. We must proceed to the rebirth of Greece. A country of equality, democracy and social justice,” he underlined.
Although Portugal, Spain and Cyprus have also borrowed from the ESM, Greece’s troubles have been worse, according to officials.
“Greece is exceptional. It has received much more loans from us than any other country,” ESM Managing Director Klaus Regling told Ethnos newspaper in an interview. “No other program country has received anything comparable. Therefore, the monitoring will be tighter than in the other cases and this will take the form of the so-called enhanced surveillance.”
EU officials speak of two main potential scenarios for the next 15 years. In one, a solvent but ‘stagnating’ Greece is still burdened by stubbornly high debt and unemployment. The other, brighter picture, is of a reinvigorated economy as Greece shakes off legacy problems.
In Greece, successive governments had borrowed heavily for three decades to fund generous spending on jobs given to political supporters, while tolerating widespread tax evasion and covering up budget shortfalls. All that blew up mightily in October 2009, when Greece admitted its budget deficit was much bigger than previously reported. Shocked investors no longer would risk loaning Greece money at affordable rates, forcing the government to turn to rescue loans from the other eurozone countries and the International Monetary Fund.
The loans came with tough conditions: closing deficits, which led to aggressive tax increases and spending cuts; and a raft of reforms aimed at improving tax collection and the business climate in general. The economy, hit hard by spending cuts, shrank by a quarter.
All told, Greece now owes total debt of 322 billion euros ($366 billion), or over 180 percent of annual economic output. Of that, 256.6 billion euros is owed to eurozone creditors and 32.1 billion to the International Monetary Fund. In 2012, about 107 billion euros in debt was lopped off by inflicting losses on private bondholders.
Monday is the day the third and last bailout program expires, meaning no more money is available. Greece will remain subject to quarterly visits by technical experts to make sure it is meeting agreed targets for public finances until the last bailout loan is repaid, in 2060.
The other eurozone countries gave Greece enough cash to cover 22 months of financing needs and significantly eased its debt repayment terms. Greece needs to pass the quarterly reviews to activate that debt relief. But Greece will get no new reform requirements.
Some experts say that the best way to help Greece would be for eurozone countries to write off a part of the loans altogether. But governments have balked at that. The bailouts were unpopular, particularly in Germany, and loan forgiveness would be a tough sell for leaders such German Chancellor Angela Merkel.
The IMF and prominent economists say that if part of Greece’s loans are not written off, its debt loan will eventually start to rise out of control again. Greece is meant to run exceptionally large budget surpluses before interest payments – so-called primary surpluses of 3.5 percent of GDP through 2023, and 2.2 percent thereafter. The IMF says very few countries historically have been able to do that.
It says countries often quickly undo cuts, as people get fed up over lost services. Spending on state health care in Greece, for instance, has been squeezed to one of the lowest levels in the eurozone, with the poorest 20 percent of Greeks saying they spend 44 percent of household income on out-of-pocket medical expenses and many reporting they have simply done without medical care.
George Pagoulatos, a professor at the Athens University of Economics and Business, says that in the end the country’s creditors may have to lower their expectations for how much Greece can save.
He thinks lower surpluses plus better economic growth from the pro-business reforms could be the key to make debt sustainable.
“It doesn’t mean that tax evasion has been eradicated or that governments will no longer do favors for their supporters,” Pagoulatos said. But the degree of reform should not be underestimated. The changes over eight years “have been very significant and they must have an impact on productivity.”
Italy’s slow growth since joining the euro has meant that the eurozone’s third-largest member has failed to work down the huge debt burden it carried into the currency union when it joined as a founding member in 1999. It remains at an elevated 133.4 percent of GDP, the second highest after Greece. Officials associated with the coalition between the populist 5 Star Movement party and the anti-immigration League have made comments about leaving the euro and criticized the European Union’s rules limiting debt and deficits. That has raised fears of a new debt crisis.
Eurozone officials have set up ways to protect the currency union in a crisis. One is to have the European Central Bank offer to buy bonds of countries with excessive borrowing costs. But that requires signing up for a plan to reduce the public deficit, and that appears to be the last thing the current government would do. The most drastic alternative would be for Italy to leave the euro.
Guntram Wolff, director of the Bruegel research institute in Brussels, says Italy’s debt situation is different from Greece’s, in that most Italian bonds are in the hands of Italians. That means the governments’ debt payments stay at home to support spending and investment by Italians.
“In Italy, the debt problem is essentially an internal question,” he said.
Italy’s progess will be decided by a mix of three factors: rising interest rates, economic growth, and the political willingness to making savings in public finances over a number of years, that is, to forgo spending on things likes schools and pensions in order to pay debt. The recent political turmoil has unnerved investors, who raised the cost for Italy to borrow on bond markets.
“Whether Italy will be able to do this politically and economically, that is the 2 trillion euro question,” said Wolff, referring to the size of Italy’s public debt. He believes politicians’ determination to keep public finances in check is eroding. “So I would say the picture looks grimmer than it did six months ago.”
Ultimately Wolff thinks that the disruption from leaving the euro would be so great that the government would change course.
The losses “would be so massive, people would say, no, no let’s not do that.