The Greek patient returns for more help


The Greek begging bowl is being brandished, once again, in European capitals. The leader of the country’s coalition government, Antonis Samaras, wants Athens to be given more time to fulfil the conditions of its IMF/EU bailout. Under the agreement’s present terms, Athens is required to reduce its budget deficit, which stood at 9.3 per cent last year, to below 3 per cent of GDP by 2014. Mr Samaras wants a two-year extension to hit that target. There is also talk that Greece will request support worth a further €20bn (£16bn) to help the country recover.

Tomorrow Mr Samaras will meet Jean-Claude Juncker, the Luxembourg premier who heads the group of eurozone finance ministers. And then, on Friday, he’s on to Berlin, where he will make the case to Europe’s ultimate paymaster, Angela Merkel, the German Chancellor.

So far, so familiar. Athens has been pledged around €180bn in financial support from the European Union and the International Monetary Fund since it crashed out of private debt markets in May 2010. Of this, around €73bn has already been distributed. The country also benefited from a €100bn debt forgiveness package agreed in March, where private investors grudgingly agreed to write down the face value of their bonds by 50 per cent. So why, after all this help, does Greece still need to rattle the collection tin across Europe?

There are various reasons. One is the fact that Greece was effectively without a government for two months this year after May’s parliamentary elections failed to produce a clear winner, putting back the economic reform timetable. Mr Samaras’ broad coalition government was only formed on 20 June. Another reason for the shortfall is that the proceeds from a €50bn privatisation programme have also been disappointing, with just a couple of billion euros raised thus far from disposals of state-owned assets.

But the primary reason is that the Greek economy remains mired in severe depression a full five years after its bubble burst. This slump is pushing up welfare payments, as unemployment has spiralled to 23 per cent. It has also hammered tax revenues as businesses have gone bust and consumers have stopped spending. Both are making it much harder for Greece to reduce its budget deficit. All the cuts and tax hikes that the government has enacted in the past three years, amounting to 8 per cent of GDP, have also sucked demand out of the economy.

And it could get much worse. Last week the government said that its economy was 6.2 per cent smaller in the second quarter of 2012 than the same period in 2011. As the chart shows, the IMF expects the Greek economy to contract by 4.7 per cent this year, to flatline in 2013 and return to growth in 2014. But reports in the Greek press suggest that the Athens government is expecting a contraction of as much as 7 per cent this year, a further 4.5 per cent fall next year and no recovery until 2015. The IMF could, of course, be right, but it is worth noting that the institution has been spectacularly over-optimistic about Greek growth in recent years. In July 2010 it was expecting the economy to grow by 1 per cent this year.

A growth shortfall also puts the Greek national debt on an unsustainable trajectory again. Thanks to the debt forgiveness programme, Greece’s public debt burden was projected to fall to 120 per cent of GDP by 2020. But if the Greek depression does not bottom out next year, that target is likely to be missed as well. And Greece’s hopes of returning to the private debt markets in 2014 will also probably evaporate too.

Fiscal inspectors from the “Troika”, the European Central Bank, the IMF and the European Commission, are set to decide on whether to release a $31.5bn (£20bn) instalment of aid to Greece in early September. Without that cash Greece will again be facing the prospect of a default and probable exit from the euro.

The Troika will be looking for signs that Greece is living up to its side of the bargain on deficit reduction. Mr Samaras is reported to have identified a further €11bn in cuts, equivalent to 5 per cent of GDP, due between 2013 and 2015 to help put Greece back on track. But unconfirmed reports suggest Athens is being asked by the Troika to identify a further €2.5bn in economies. Hence Mr Samaras’ request for Greece to be cut a break.

Will Greece get more time to meet its commitments and extra support? It will largely depend on German politics. The German foreign minister, Guido Westerwelle, has suggested he would be open to an extension given the time lost in forming the coalition. “The time that was lost in the Greek election campaigns must be dealt with,” he has said. But some German politicians from Ms Merkel’s conservative movement have begun to talk increasingly openly about the desirability of cutting Greece loose.

And some analysts say that the chances of Ms Merkel asking her parliament to approve more financial aid for Greece are slim. “The opposition to any further aid for Greece will make Ms Merkel very wary of having another vote on the country in the Bundestag,” said Christian Schulz of Berenberg Bank.

Ms Merkel faces a difficult decision. She can keep her coalition intact and see Greece edged closer to the eurozone exit door, or she can try to help Greece and push her government to breaking point. Mr Samaras will need to be very persuasive this week.


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