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Abu Dhabi, UAETuesday 25 September 2018

After a bruising eight years, Greece finally exits bailout programme

Greece has now returned to growth but households continue to feel the effects of unpopular and stinging austerity

Young men look over Athens. Greece's third and final bailout has officially ended. AFP
Young men look over Athens. Greece's third and final bailout has officially ended. AFP

Greece has successfully exited its final, three-year bailout programme, agreed in August 2015 to help it cope with the continued fallout from a debt crisis, the euro-zone's ESM rescue fund said on Monday.

"Today we can safely conclude the ESM programme with no more follow-up rescue programmes as, for the first time since early 2010, Greece can stand on its own feet," said Mario Centeno, the chairman of the ESM's board of governors.

"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, according to Reuters.

The ESM has disbursed €61.9 billion (Dh259.7bn) over three years in support of macroeconomic adjustment and bank recapitalisation.

A further €24.1bn that was available to Athens under the programme was not needed, the fund said.

The European Union, the European Central Bank and the International Monetary Fund loaned debt-wracked Greece a total of €289bn in three successive programmes in 2010, 2012 and 2015.

The economic reforms the creditors demanded in return brought the country to its knees with a quarter of its gross domestic product (GDP) evaporating over eight years and unemployment soaring to more than 27 percent.

At the time of the original May 2010 aid package, politicians from euro-zone creditor countries argued the crisis was the result of chronic fiscal and economic indiscipline. To justify breaching a “no bailout clause”, loans were tied to strict conditions covering everything from government spending to public administration and justice, Bloomberg said.

So how has Greece performed?

While Greece’s crash rippled far beyond the borders of the country of just 11 million people, the effect at home was particularly dramatic. Economic output fell by a quarter and living standards collapsed after the loss of more than a million jobs pushed unemployment at one point to 28 percent.

Public Finances

The Greek leg of the global financial crisis was sparked when George Papandreou’s newly elected government revealed that the country had misled the world about its finances and the 2009 budget deficit had swelled to more than 15 per cent of gross domestic product, five times the EU limit.

In recent years, the debate on Greek finances has turned more to the amount of public debt and the fiscal balance excluding the costs of servicing that debt. That’s meant less attention on the fact that for two years now, revenue has exceeded spending and the government has run an overall surplus.

This has been achieved by slashing spending while holding revenue more or less unchanged. But given the extent of the slump, maintaining steady revenue meant a huge squeeze on middle-class Greeks, who’ve had to stump up more and more in taxes.

On the spending side, Greece’s fiscal problems were partly caused by an explosion of public-sector jobs in the years before the crash. A refusal to fire workers became an early flash point between the government and the bailout providers.

Those arguments dissipated after Greece shrunk the public payroll by 150,000 jobs by only hiring one person for every five departures and not renewing temporary contracts.

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Still, progress has been slow in improving the speed of resolving civil disputes in the justice system, and the burden of red tape has made it harder to attract investment.

Over the past eight years, a constant refrain from euro-zone nations and the IMF was that Greece needs more structural reforms to make it more competitive. Over three bailouts, it’s sold state assets, made sweeping changes to the electricity market and changed regulations covering everything from lawyers to hairdressers.

There was also a big fall in labour costs, particularly after reforms to collective bargaining rules and a cut in the minimum wage in 2012. Bailout lenders argue that the drop merely offset the big run-up in the years before the crisis, which wasn’t matched by an increase in the economy’s productive capacity.

Along with rising taxes and the loss of jobs, the hit to wages was a major contributor to the drop in Greek living standards. Prime Minister Alexis Tsipras wants to roll back some of the labor reforms after the bailout, including increasing the minimum wage.

Greece hasn’t experienced the kind of export-led recovery seen in other crisis countries, like Ireland and Spain. But it’s almost eliminated its external current account deficit, as well as increasing exports’ low share of GDP.

At the outset of the Greek crisis, the country’s bankers liked to argued that their institutions were conservatively run, and that this was a problem born in the public sector. Whatever the truth of the claim, it didn’t take long for a sovereign-banking doom loop to lay the sector to waste.

The banks were rendered insolvent for a while after the 2012 debt restructuring wiped out the value of their bond portfolios, and three years later they were shuttered for weeks before reopening with capital controls in place. They’re still dealing with the fallout, saddled with soured loans amounting to almost 50 percent of their book.

These travails have led to a loss of deposits and interbank funding lines, with lenders kept on life support by central bank liquidity. The need for that emergency funding has steadily diminished and, in the buildup to the bailout exit, it was even surpassed by interbank funding for the first time since the start of the crisis.

Greece has now returned to growth, its once vast public deficit has been turned into a solid budget surplus, according to AFP, and the jobless rate has fallen below 20 per cent, officials say.

Greek households, however, continue to feel the effects of unpopular and stinging austerity.

"The reality on the ground remains difficult. The time for austerity is over, but the end of the programme is not the end of the road for reform," EU Economic Affairs Commissioner Pierre Moscovici said at the weekend.

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