Third Greek bailout looms as growth predictions reduce

As negotiations continued this week in Brussels between Greek officials and international creditors, another figure from the Greek political scene was in town.

Former prime minister Antonis Samaras met European Commission president Jean-Claude Juncker for lunch in Brussels on Monday. The two men, who are members of the centre-right European People's Party (EPP), are understood to have discussed the latest developments in the Greek crisis.

Last week in Strasbourg, Samaras attended a private meeting of the EPP at which he specifically referenced Ireland and fellow EPP leader, Taoiseach Enda Kenny, as an example of a bailout country which had successfully emerged from a crisis.

The re-emergence of Samaras in EU circles is a reminder of how close Greece was to exiting its bailout before the latest Greek standoff erupted.

His gamble in bringing forward the Greek presidential election in December directly led to the election that swept Syriza to power. Having failed to garner sufficient support for his presidential candidate in a series of votes in December, Samaras was forced to call a snap general election in January. The timing of the election coincided with a crucial point in the Greek bailout.

Exit plans

With Greece’s second loan programme due to expire at the end of December, Samaras’s government was at that time trying to negotiate an exit from the bailout, even seeking to make a clean exit from more than four years of an austerity programme, a move that was being resisted by lenders who doubted Greece’s ability to finance itself.

More than four months on, the possibility of Greece exiting its bailout and returning to full market funding seems fanciful.

The election of Syriza on a mandate to renegotiate its loan agreements with the EU and the International Monetary Fund ended any hopes of a clean exit from the bailout programme. Instead focus has turned to renegotiating the existing stalled bailout programme which, in February, was provisionally extended to the end of June by the eurogroup on condition that Greece signed up to economic reforms.

Figures from the European Commission this week also illustrate the economic price paid by Greece since the election. In its Spring Economic Forecast published on Tuesday, the commission revised downwards its growth projections for Greece. It forecasts growth of 0.5 per cent this year, compared with a prediction of 2.5 per cent just three months ago, though it still predicts growth of 2.9 per cent next year if bailout talks conclude successfully. Greece's debt levels have also suffered, with the commission expecting Greece's debt/gross domestic product ratio to climb to 180.2 per cent this year, having previously projected Greek debt to fall from 176.2 per cent of GDP to 170.2 per cent.

More worryingly, the commission said Greece’s primary surplus – a figure touted by the troika as a key indicator throughout the Greek bailout – contracted to 0.4 per cent last year compared with previous estimates of 1.7 per cent, due to the fall-off in revenue collection towards the end of last year. Some Greek citizens stopped paying their taxes ahead of the election.

While the economic picture painted by this week’s forecasts is bleak, obviously this would be a price worth paying for Greek citizens if Syriza succeeded in its aim of securing a significant debt writedown. In a boost to the Greek negotiating position, the IMF has reportedly called for European lenders to grant Greece some kind of haircut on its debts.

Debt writedown

While the IMF was in favour of steeper debt writedowns for Greece during the height of the sovereign debt crisis, ultimately these suggestions were not taken on board by the European members of the troika. Although most of the debt under the outstanding Greek bailout is set to come from the IMF, any significant debt writedown is likely to gain short shrift from its EU partners. While a debt-restructuring package of some kind for Greece may be considered in time, any debt write-off on the scale originally envisaged by Syriza looks increasingly unlikely, particularly given Syriza’s mishandling of relations with other eurogroup finance ministers since the elections.

As negotiations intensify in Brussels ahead of a key eurogroup meeting in Brussels next Monday, officials are racing to agree a provisional deal, with focus continuing to be on labour market reforms, pension and privatisations. Whatever the outcome of this week’s talks, however, a third bailout for Greece this summer looks inevitable. Greece’s thorny relationship with its lenders may have many years left to run.