Showdown: Is Greece Headed towards a Financial Meltdown?
Athens and Europe have agreed to postpone their economic showdown for a few weeks. Currency and financial markets remain skeptical. Rightly so. This is far from a solution. For those who look for a more lasting agreement, much less movement toward a fundamental resolution, it does not even buy much time.
The point of urgency (this time) was a June 5 payment due from Athens to the International Monetary Fund (IMF), the first of four. Greece’s government said it had the monies on hand to meet that €300 million obligation. Doubts abounded. Whatever the truth of Greece’s ability to cover this particular payment, it remains plain that Athens cannot make good on the full €1.6 billion due over the course of the month. To discharge that obligation, the Greek government must reach some agreement with the European Union (EU), the European Central Bank (ECB), and the IMF, the so-called troika, to gain access to the €7.2 billion remaining in the bailout fund established in 2012. The IMF, by allowing Greece to bundle all its June obligations into one payment due on June 30, has bought a grand total of some three additional weeks for negotiations.
It may yet work out. Greece’s prime minister, Alexis Tsipras, has suggested that negotiations are close to a more lasting agreement. Politics, however, suggest otherwise. Negotiators for the troika are in a bind. They fear that any substantive relaxation in their demands for budget austerity and other economic reforms would risk inviting Italy, Spain, and others among Europe’s beleaguered periphery to seek similar levels of relief. The Greek government is, if anything, in an even tighter bind. It was elected to relieve the strictures of austerity but also to keep Greece in the common currency. Its leaders, then, run one huge risk with the electorate if they bow too readily to the troika’s demands for continued of austerity, but they run a second risk if they bargain too hard, fail to reach agreement, default, and disappoint the electorate by possibly losing membership in the common currency.
Difficult as these tradeoffs are, there has been some movement. The troika has softened its stance. It has long insisted that the Greek government produce a surplus on the part of its budget not involved in debt service. It had targeted such primary budget surpluses, as they are called, at 3.0 percent of the country’s gross domestic product (GDP) in 2015 and 4.5 percent by 2016-2017. To give the Greek government something to take home to its electorate, it recently altered those demands, asking for a primary budget surplus targets of 1.5 percent of GDP for 2015 and 3.5 percent by 2018. Presumably, this would have allowed the prime minister some bragging rights but not go so far that Italy, Spain, and others abandon their own commitments to budget discipline. As it is, Athens has failed to respond, leaving matters far from decided as June 30 approaches.
Even if Greece and the troika could arrive at an agreement, huge pressures would remain. To be sure, financial and currency markets would likely react well, as such a settlement would lift immediate fears of default or a Greek exit from the euro. But the Greek economy would still suffer from the austerity that would inevitably accompany an agreement, even if it were less intense than the troika might have otherwise demanded. The electorate, accordingly, would continue to insist on relief from its government. Especially because Greece seems constitutionally incapable of the kind of labor and product market reforms that would enable the economy to grow even under austere budget conditions, Athens would ultimately fail to deliver on all its commitments under such an agreement, and a new crisis would emerge in relatively short order.