All roads lead to the debt problem

Contrary to what may have been said before or after Thursday’s Eurogroup in Brussels, the fate of the stuttering review of Greece’s program is primarily about the country’s public debt.

The biggest factor standing in the way of Greece and the four institutions overseeing its bailout agreeing on how to conclude the review is what primary surplus targets Athens will have to achieve in the coming years and how it will attain them. This is directly linked to Greece’s debt, as the size of the primary surplus is defined by the amount Athens needs to set aside in order to meet – from its own financial resources – its obligations to lenders.

This is why Greece is required to meet a primary surplus target of 3.5 percent of gross domestic product (GDP) from 2018 for an – as yet – unspecified number of years.

The International Monetary Fund believes the measures Greece has agreed to so far will leave it around 2 percentage points short of this target and has asked for the government to adopt legislation that would reduce the tax-free threshold for personal incomes and cut pensions.

Naturally, the coalition wants to avoid such a politically toxic demand, but the European lenders want the Fund to remain part of the Greek program and believe Athens should agree to its request.

Reports from Brussels suggested that all four of the institutions asked Greek Finance Minister Euclid Tsakalotos for the upfront legislation of the measures, which would only apply from 2019 onwards if Greece falls short of its fiscal targets. This suggests that Prime Minister Alexis Tsipras is being put into a very tight spot. He insisted in an interview with the Efimerida ton Syntakton newspaper last week that Parliament would not have to approve “a single euro” in extra measures – a pledge that lenders seem set to put to the test.

However, the demands being made of the Greek government cannot be seen in isolation. The eurozone is facing similar pressure from the IMF to agree to comprehensive debt relief, not just the short-term measures the European Stability Mechanism adopted last week, which are designed to decrease Greece’s debt load by around 20 percentage points over the next 43 years.

Some eurozone member-states believe the IMF has to be part of the program because only it has the reformist vigor and monitoring rigor to ensure Greece takes the necessary steps. However, its involvement carries a price. The Fund has drawn a new debt sustainability analysis (DSA) for Greece, which is to be put before its executive board on February 6 and which carries a severe warning over the current trajectory.

Kathimerini’s Washington correspondent, Katerina Sokou, reports that under its baseline scenario, the Fund sees the Greek debt-to-GDP ratio at 164 percent in 2022 and soaring to a staggering 275 percent in 2060. Greece’s gross financing needs are estimated at less than 20 percent of GDP until 2031 but after that they skyrocket to 33 percent in 2040 and then to 62 percent by 2060.

The Fund believes that for the debt to return to a sustainable path, the grace period on Greece’s loans should be extended to 2040, maturities must be extended to 2070 and the interest rate on eurozone loans should be lowered to below 1.5 percent for 30 years. According to the IMF, these measures would lower Greece’s gross financing needs to 15-20 percent of GDP.

Understandably, nobody in the eurozone wants to have a discussion about how to make Greek debt sustainable at this time. Elections are coming up in the Netherlands, followed by France and Germany, and there are few European politicians around who want to explain why they should be providing ample relief for the much-criticized Greeks, especially when euroskeptic and nationalist sentiment is on the rise.

However, there will never be an easy time to address the Greek debt issue. There will always be a local or national election that makes it inconvenient, Greece will not suddenly become a model country and it will take many years for trust in the Greek political system to return.

Also, putting off a definitive response to this difficult question creates a different kind of Greek debt problem. While the attention is on the country’s public debt and the uncertainty this brings for Greece’s future, the country’s economy continues to operate with the handbrake on, making it difficult for businesses and taxpayers to meet their obligations and leading to an accumulation of private debt.

According to figures published last week, the amount of social security contributions owed to the government rose by 615 million euros quarter-on-quarter in the final three months of last year, taking the total outstanding debt to 17.2 billion euros. For all of 2016, the amount of unpaid contributions rose by 14.2 percent, a symptom of more companies going bust or cutting corners and self-employed Greeks finding it increasingly difficult to meet their rising social security costs while working in a stagnant economy.

The pressure that is being exerted on Greeks as a result of the economic stranglehold the country finds itself in is also evident in their increasing failure to keep up with their loan repayments. According to a Bank of Greece report published earlier this month, the non-performing exposure (NPE) ratio of Greek loans reached 45.2 percent last September. Once denounced loans (ones for which legal action has already been launched) are taken out of the equation, 70 percent of NPEs have been non-performing for more than a year and 48 percent for more than two years.

One of the most worrying figures, though, is that even when banks and their customers are able to reach a settlement, usually a long-term payment plan, it is often not enough. According to the central bank, 37.5 percent of settled loans have had to be resettled because customers were unable to keep up with even the reduced payments.

It is a reminder that in the discussion about Greek debt, which has become such a mephitic issue for European politicians, there is one debt that matters above all else: the one to the Greek people. They have endured all the fallout from the mistakes of the past, the short-termism of the decisions taken since the crisis began and the many turns that have been taken by their governments and its lenders over the last few years. They are still waiting for their moment of relief.