Only debt relief will end the Greek crisis

As long as Athens remains under the thumb of its creditors, reforms will fail to take root.

By Yiannis Mouzakis and Nick Malkoutzis


As Greece heads into another meeting of eurozone finance ministers, it finds itself in a painfully familiar position: in desperate need of more bailout funding and a dose of clarity about its future.

But the country isn’t doomed to be the eurozone’s wounded animal forever. If the bloc can agree to give its weakest member a chance of turning itself around, Athens has the means to lift itself — and the rest of the Continent — out of an excruciating cycle.

Eurozone finance ministers are likely to agree that Greece should receive more than €7 billion in fresh loans, but domestic political concerns and all-around fatigue mean Thursday’s Eurogroup meeting is unlikely to be a watershed moment.

Luckily, there is one thing on which everyone can agree. Greece will only shed its pariah status — and free its lenders to end their laborious monitoring of its economy — if it can successfully conclude its third bailout program next summer.

For this to happen, the creditors will have to agree to lighten the country’s debt load and Greece will have to remove barriers to growth. One without the other will not be enough.

There are several key areas where reforms have either not happened or have failed to take root, restricting Greece’s ability to reach its full potential.

Debt relief for Greece, whose public commitments stand at 179 percent of GDP, remains a highly divisive issue among eurozone members and the International Monetary Fund, whose expectations at last month’s meeting went far beyond what Germany and other eurozone member states believed to be politically feasible.

But political feasibility cuts both ways. And after nearly a decade of unpopular, painful and not always successful reforms, Greece needs space to breathe.

Coming to an agreement on debt relief will be crucial for the country’s ability to put itself back on a path to growth.

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 Reform, a dirty word

There are several key areas where reforms have either not happened or have failed to take root, restricting Greece’s ability to reach its full potential.

Public administration, for example, is still in dire need of an overhaul. The number of civil servants in the core public sector has fallen dramatically since 2009 and, as a result of poor planning and constant cuts, public services have deteriorated. Vital branches of the public sector — including health care, tax offices and even the country’s statistics service — are woefully understaffed.

The ramshackle state of Greece’s judicial system is another obstacle to economic activity. According to the latest data from the EU 2016 Justice Scoreboard, it takes more than 1,000 days before a dispute is settled or a competition case is heard in the country’s administrative courts. It takes more than 3.5 years to resolve an insolvency — a disastrously slow rate second only to Romania among EU countries. The delays have dire implications for the strength of contracts in Greece, and reforms passed last year have hardly improved the situation.

The Greek government also desperately needs to accelerate the management of non-performing loans (NPLs). While NPLs were below 10 percent of outstanding loans in 2010, they now account for approximately 45 percent of loans, requiring bad loan provisions of around €46 billion and restricting banks from assuming basic lending functions. The legislative groundwork for a distressed debt market and better management of non-performing loans has already been laid; Athens now needs to push forward on implementing it.

If the Greek government addresses these issues quickly — while the end of the country’s bailout program and a permanent solution to its debt are in sight — it may help dispel the toxicity surrounding the idea of reforms among its citizens.

To many Greeks, the word “reform” is inextricably linked to loss of income or employment. An opinion poll by the University of Macedonia’s Research Institute published last month found that 82 percent of Greeks believe their personal income will be significantly affected by the pension and tax reforms parliament passed last month.

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Having seen their disposable incomes drop by 37 percent since 2009 and close to 1 million jobs vanish over the last eight years, it is no surprise that Greek voters are averse to policy changes. This mistrust has created a self-defeating loop of social unrest — police report about 15 protests every day — and a high turnover in ministers and governments.

 Greek fatigue

Once Greece knows the next few years will not be pockmarked by fractious program reviews, it can start to look beyond the next three to six months without worrying about constantly ticking off items on its creditors’ to-do list.

Establishing clarity about Greece’s debt servicing costs and its fiscal targets for the next decades would help clear this path for the future, although Greece would still need to set aside the equivalent of nearly 100 percent of its GDP between now and 2060 to meet its primary surpluses — an immense task.

Nevertheless, establishing some certainty would give the private sector a clear view on Greece’s future, allowing firms to take decisions on capital expenditure they have put off so far. Greek assets available for privatization would become more attractive, boosting domestic demand and paving the way for a return to market financing.

Allowing Greece to come out of the program next year is the best chance to give the country and its lenders a sense of returning to normality.

It would also help lift the mood in Greece. Since 2010, Greeks have been disappointed by repeated promises of an imminent recovery, and instead watched as successive finance ministers returned empty-handed from Eurogroup meetings. Compounded by the day-to-day pitfalls of an economic depression unprecedented for a developed country, morale among Greeks is seriously low.

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Only 21 percent of Greeks believe that their children will be better off financially, according to a recent Global Attitudes Survey conducted by Pew Research that also found that 98 percent of Greeks see their country’s economic situation as “bad,” 46 percentage points above the global median.

Few Greeks have hope that the latest package of reforms and fiscal measures will help the country exit the bailout program and its never-ending debt crisis, with only 12 percent saying they believed the legislation would be effective, according to a University of Macedonia survey.

As long as Greece remains under the thumb of its creditors, it will be extremely difficult to overcome this level of disaffection. Each review conducted by the country’s lenders triggers fresh uncertainty — and in more extreme cases, speculation about Grexit — which kills any economic momentum and douses hopes of a recovery.

Allowing Greece to come out of the program next year is the best chance to give the country and its lenders a sense of returning to normality. A balance between reforms and debt relief is the best way of achieving this.

A few months ago, Greece’s Finance Minister Euclid Tsakalotos likened the country to a gazelle trying to avoid being trampled by two elephants — Germany and the IMF. This wounded animal needs time to recover so that, one day, it will be able to walk on its own.


Yiannis Mouzakis and Nick Malkoutzis are the co-founders of political and economic analysis website MacroPolis.