The Greek government was forced into accepting a third bailout under very difficult circumstances on July 13. The dramatic euro summit of July 12 lasted 17 hours before a new bailout package of €86 billion was agreed by eurozone prime ministers. Conditional on a new recessionary policy mix, negotiations are now underway to determine the specifics.
While the details of the new plan are undecided, so far we know that it will last three years. A higher than anticipated recession might further increase Greece’s financing needs rendering the above figure inadequate.
But regardless of the specifics, since the recessionary policy mix will remain the same, there is nothing to suggest that the third bailout will have a different fate to its predecessors. The first bailout program in 2010 failed and was replaced by a second one in 2012 and now a third, similar one. All demanded unreasonable high fiscal consolidation without any significant debt relief. After the new agreement recession is very likely to deepen again.
The Greek economy faces yet another recessionary year with depressed consumption, anaemic investment and an extremely high unemployment rate. On top of that, the ongoing humanitarian crisis is deepening. The third bailout will exacerbate this.
The tremendous fiscal consolidation implemented by Greece and a badly designed private debt haircut in the beginning of 2012 that undermined the banking sector under the terms of its previous two bailouts, has led so far to economic losses equal to a quarter of GDP and pushed unemployment to levels over 25%. No other country has suffered similar losses in peacetime.
Another mark of the recessionary policies being a failure is Greece’s inability to meet the economic targets predicted by its creditors. IMF forecasts of nominal GDP overestimated the actual numbers by 25% in 2013 and 2014. The same will probably happen in 2015. Financing Greece’s debt in the same old way is expected to further boost sovereign debt to the level of 200% of GDP. This figure is, in its own right, a guarantee that it will take years before Greece regains access to markets (without a drastic intervention by the ECB).
There are also elements in the new programme that are a clear outcome of a bad design. Greece has already received a €7 billion bridge loan to meet its summer liquidity needs by the EU’s emergency fund, the European Financial Stabilisation Mechanism. If there are further delays to the new agreement, Greece will need another bridge loan of €14 billion to pay back a maturing bond to the ECB of €3.2 billion, due on August 20, and to recapitalise the country’s banking sector before the autumn stress-tests, which will reveal how robust (or not) the Greek banking system is.
After a prolonged holiday the banking sector requires an urgent recapitalisation. This is mainly due to cash withdrawals from the Greek banks and the high levels of the non-performing loans triggered by the persistent recession and the bank closure. According to rough EU estimations, banks will immediately need an injection of €25 billion. In the new agreement the plan is that this will come from privatising state assets.
On the basis of past experience, this target is unthinkable. Privatisation receipts for 2011-2014 (under the terms of the last two bailouts) were only €5.4 billion . But even if the target is reached it will take years to collect the recapitalisation funds, which are urgently needed now. In the meantime, limits on cash withdrawals remain, with Greeks limited to withdrawing €420 a week and unable to send money abroad.
It is clear that the new bailout plan is inadequate even before the official agreement. The plan will also meet increasing resistance from Greeks – the majority of whom will not benefit from the fire-selling of public property. The fact that the state assets will be mandatorily transferred to a newly created fund will raise further concerns. Aspects of the new agreement are not only poorly designed but they are also lacking democratic legitimisation.
Given the size of the recession and the increasing unpopularity of the reforms, a new political impasse is very likely to arise before the end of the economic crisis. The economic conditions and targets of the new programme will likely be missed, flagging up a new failure long before the lapse of the three years.
Meanwhile, Greece has been trapped to a self defeating plan. With the option of Grexit now put on the negotiating table for the first time by officials from core countries, any state attempting to break from the recessionary-led reforms will be scared into submission. This may be enough for the moment to tackle the anti-austerity forces in Europe; but it is also a slippery ground for the longevity of the eurozone.
Dr. Dimitris Sotiropoulos is Senior Lecturer in Finance at the Open University Business School. Prior to that he worked as lecturer and researcher in academic institutions in the United Kingdom (Kingston University London), Germany (Max Planck Institute for the Study of Societies) and Greece (University of the Aegean and University of Patras).
Dimitris Sotiropoulos' current research interests are focused on the political economy of derivatives markets, the social aspects of risk management and the history of financial innovation. He has published three books, the most recent one being The Political Economy of Contemporary Capitalism and Its Crisis: Demystifying Finance (Routledge).
His papers in journals and edited volumes (in English, Greek and German) cover research areas from the history of economic thought to the empirical analysis of the recent Euro area crisis. His general research interests also include the theory of value and money, international political economy and the history of economic thought.