Since 2008, the government debt crisis has been an unresolved issue of the European Union. Making headlines once every few months with another pack of austerity measures or failed bailout negotiations, the Greek crisis seems unlikely to ever come to an end. This month, negotiations between the IMF, Eurozone officials and the Greek government are stalling yet again as Greece attempts to reach an agreement on a third bailout programme it desperately needs to be able to repay its creditors this summer.
The Greek government-debt crisis was triggered by the financial crisis of 2007-2008. As, amid the turmoil in global financial markets, the Greek government announced in October 2009 that for years it had understated its government deficit, the soundness of Greek finances instantly came into question. The news of the structural weaknesses of the Greek economy resulted in a crisis of confidence, which led to the country being shut out from borrowing in the financial markets.
As its economy staggered and failed to regain the lost trust, it soon became apparent that without urgent help, Greece could default on its loans and slump even deeper, which could bring about a new crisis for the Eurozone as a whole. To avoid such a calamity, the so-called troika – a triumvirate composed of the IMF, the European Central Bank and the European Commission – approved two bailout programmes for Greece.
As part of the first bailout programme, starting in May 2010, Greece received a three-year €110 billion loan with an interest of 5.5%. The second bailout programme, commencing merely a little over a year later, composed of an extension of the Greek loan repayment periods from 7 to at least 15 years, a cut of interest rates to 3.5%, as well as another €109 billion support package. Later in 2011, the leaders of Eurozone countries and the International Monetary Fund also agreed with banks to write off half of most Greek debt.
Yet these bailouts came at high costs. They were only approved on the condition that Greece implements harsh austerity measures and reduces its government deficit. Greece cut government expenditure and increased taxes dramatically. It was also required to streamline the government, fight tax evasion and encourage business in the country.
Austerity measures implemented along with both bailouts were met with stark opposition from the Greek public. This manifested itself in protests, violent riots and social unrest. On 29 May 2011, over 100,000 Greeks protested against austerity in front of the Hellenic Parliament.
This social unrest was a public outcry against the dire social and economic consequences that the crisis and austerity came with. Greek GDP declined dramatically as a result of the crisis. It fell from €242 billion in 2008 to €179 billion in 2014, experiencing a 6.9% fall in 2011, its worst year. Public debt rose as well, resulting in its ratio to GDP reaching 177% in 2014, which put Greece in third place in the list of countries with the highest public debt to GDP ratio in the world. Unemployment reached unprecedented levels too, rising from 7.5% in 2008 to 25% in 2015. In 2015, the OECD reported that every fifth Greek citizen lacked funds to meet daily food expenses. In such economic conditions, social unrest was inevitable.
Yet, despite the bailouts and the austerity, it seemed that the crisis only deepened. Although the bailouts were supposed to enable Greece to stabilise its finances and rebuild trust in its economy, they were mainly used to pay its international loans. As a result, the Greek government still possesses a very high level of debt, while it failed to implement real structural changes in its economy.
Due to the failure of the first two bailouts, talks of a third one started as early as in 2012. Further packages of austerity measures ensued in order to meet the conditions of the next bailout of €130 billion, which resulted in mounting discontent of the Greek people. In 2015 the Greek public elected Alexis Tsipras, the leader of the anti-austerity left-wing political party Syriza, as its new prime minister, and then in July voted against the austerity terms proposed by the EU in the Greek bailout referendum. As a climax of the situation, Greeks banks closed for weeks in July, highly limiting cash withdrawal.
In August 2015, Greece and its creditors succeeded in agreeing to a third bailout programme of €86 billion in return for further austerity measures. Yet these have yet to be approved, and the IMF has questioned Greece’s debt sustainability as well as its economic and budget targets. As a result, talks over how to complete a review of the bailout began, but they have not progressed.
On Friday, European officials, Eurozone representatives and Greek Finance Minister Euclid Tsakalotos sat down in Brussels to resume negotiations on the new rescue plan. However, progress does not seem likely and talks are of stalling negotiations yet again. On the 20th, Eurozone finance ministers meet for the last time before European elections, which will make an agreement politically difficult, so it seems like the final chance for an agreement to be reached. Yet Greece desperately needs the new bailout. Unless it is approved, it will struggle to repay its creditors this June, and yet again, risk defaulting on its debt and even crashing out of the euro.
