Greece's Settlement and Its Impact on the Eurozone

Greece's Debt Settlement Won't be the End of the Story

Milos Bicanski/Getty Images

Greek Prime Minister Alexis Tsipras agreed to a broad set of new concessions in July 2015 to avoid a financial collapse, despite earlier promises to overturn austerity measures that undercut the country’s economy and left people suffering.

The new agreement provides the country with a third international bailout in five years – worth about $96 billion – as well as easier repayment terms on some of its existing debt that has ballooned to more than 300 billion euros and a short-term economic stimulus plan designed to help the economy recover.

 The bailout fund would be largely funded from proceeds derived from selling off state assets, including telecoms and ports among other things.

In exchange, Greece must implement broad reforms that include cuts to pension funds, increases in taxes, and intensive oversight from international agencies to qualify for the aid. Many of these changes are politically difficult to make, such as increasing the consumption tax to 23%, raising the retirement age to 67, and reducing pension benefits for an aging population, while simultaneously tackling issues that have plagued the country for years. 

Greek Cycle of Debt

The International Monetary Fund (“IMF”) has insisted that Greece be granted far more debt relief than European government have been willing to consider. In particular, the international finance body recommended a 30-year grace period on servicing all of its European debt, including new loans, and a dramatic maturity extension.

Otherwise, it recommended annual transfers to the Greek budget or deep initial haircuts on existing loans.

These concerns stem from the cycle of debt argument made by Greece and many other international economists. With ongoing austerity measures and no debt relief, the country is being forced to pay back bigger loans, while its economy is doomed to slow down.

The economic slowdown could then lead to the need for even more loans in what skeptics call a vicious cycle or downward spiral that could lead to greater problems ahead.

“The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM,” said the IMF in a statement.

Greece's Lack of Allies

Many of Greece’s European brethren don’t have sympathy for the country’s economic woes. In Germany, Finance Minister Wolfgang Schaeuble made it clear that some members of his government think it would make more sense for Greece to leave the Eurozone temporarily rather than take another bailout. Other countries – including many poorer than Greece – may find it difficult to pay for its bailout while struggling with their own issues at home.

The larger problem is that of discontent with the Eurozone in other member countries as a result of these dynamics. For instance, Finland – which has its own economic problems – has a new coalition government that includes the anti-European Finns, whom have threatened to bring down the coalition if a Greek bailout goes ahead.

Others like Estonia, Latvia, Slovakia, and Lithuania have also been vocally unhappy with the Greek bailout.

These countries could begin to exit the European Union in response to these kinds of austerity demands, especially following the 'Brexit' earlier this year.

Potential Concerns Ahead

Greece's agreement with creditors ran into issues in December 2016 when the country awarded pensioners a modest Christmas bonus and said it would pay for school meals for 30,000 impoverished children. In response, Germany submitting a complaint to the ECB and ESM and the regulators responded by freezing the country's debt relief payments. These measures could create further problems for the country moving into 2017 and beyond.

Key Takeway Point

  • Greece’s new settlement will provide a much needed bailout and an end to its immediate economic crisis.
  • The IMF and many economists worry that some debt relief is needed in addition to the austerity measures and bailouts to make the deal sustainable.
  • Greece has few allies in Europe when it comes to providing relief, while many countries openly oppose allowing them to remain in the Eurozone at all.