What The Greek Government Isn't Saying About The New Bailout Deal

The bailout deal Greece finalized with creditors on Tuesday, worth up to $94 billion, won't bring significant relief from austerity, contrary to Greek government claims. The government takes credit for winning lower budget surplus targets than in previous bailout proposals, but experts said the changes are designed to compensate for the Greek economy's continued deterioration, making them neutral at best.

The left-populist Greek government touts lower primary surplus targets in Tuesday’s bailout deal as a major victory against austerity. An anonymous Greek government official told the Greek newspaper Kathimerini that the lower budget targets would spare Greece the pain of $22 billion in budget savings the country otherwise would have had to make by the end of 2018. 

Yannis Koutsomitis, a Greek political analyst, celebrated the new targets as a major shift. “Where is the austerity?” Koutsomitis tweeted, after listing the targets from 2015 through 2018. He added in a subsequent tweet, “Creditors [co]sign end of austerity in #Greece.”

And at first glance, Greece does appear to have won looser budget targets, giving it greater economic breathing room. The new financing package from its creditors -- the eurozone nations, the European Central Bank and the International Monetary Fund -- requires Greece to achieve a primary budget deficit, equal to 0.25 percent of its GDP in 2015, according to Reuters. The country must then attain primary budget surpluses equal to 0.5 percent of GDP in 2016, 1.75 percent in 2017, and 3.5 percent in 2018.

Aside from the 2018 goal, the targets are lower than what Greece and its creditors had agreed upon earlier in the summer. By late June, Greece had accepted primary budget surpluses equal to 1 percent of GDP in 2015, 2 percent in 2016, 3 percent in 2017, and 3.5 percent in 2018. In April, creditors were obligating Greece to achieve a primary surplus equal to 3 percent of GDP in 2015, and 4.5 percent in 2016, where it would remain before declining slightly in 2018.

The budget targets are the focus of widespread attention, because they determine whether the bailout deal will be economically sustainable. Greece’s creditors want the country to generate steadily larger primary budget surpluses -- surpluses before interest -- to maintain debt repayments, and to gain long-term fiscal discipline. But the quicker the Greek government saves money, the more it must take money out of the economy through spending cuts and tax increases. As a result, budget savings that are too drastic risk setting back the economy even more, which may ultimately prevent Greece from recovering economically and repaying its debts.

Fresh Economic Damage

Several experts with widely varying opinions of the Greek government told The Huffington Post that the Greek economy's recent losses have already offset the relief that lower surplus targets could have provided earlier. When a country’s GDP is smaller, generating a lower budget surplus as a percentage of GDP can have the same impact on its economy as a higher surplus would have on a proportionally larger economy. 

The creditors’ acceptance of lower budget targets merely acknowledges that achieving the previous surplus targets is now unrealistic. The creditors estimate that Greece’s economy will have shrunk 2.1 percent to 2.3 percent by the end of 2015. When they were asking Greece to reach a 3 percent primary surplus in 2015 as recently as April, they were still predicting that Greece’s economy would grow more than 2.5 percent by the year’s end.

“It is realism on the part of the creditors, but it is also the result of the steep decline of the economy and especially after capital controls,” said George Pagoulatos a political scientist and economist at Athens University of Economics and Business, who advised former Greek prime minister Lucas Papademos.

Peter Doyle, an economist and former senior manager at the IMF, agreed. “As far as I can tell, all they have done is adjust the headline primary surplus targets for the weakness in the economy that is already there, and they have done no more than that,” Doyle said.

Ashoka Mody, an international economic policy specialist at Princeton University, noted that maintaining the 3.5 percent target for 2018, while lowering the nearer-term targets, would necessitate a quicker fiscal consolidation than it did before. “The speed of the primary surplus determines the contractionary effect on the economy,” Mody said. “Going from a -0.5 percent to a 3.5 percent surplus is in my mind a terrible mistake.”

The main developments that led to Greece’s most recent economic slowdown are undisputed. The capital controls the country imposed from late-June to mid-July, which severely limited bank withdrawals and banned transfers out of the country, had the most devastating impact. Purchase orders for Greek manufacturers, for example, dropped precipitously in July, reaching levels not seen since 1999, before Greece joined the euro. The Greek stock market fell 23 percent on Aug. 3, the day it re-opened for the first time since June 28.

Prior to capital controls, Greece’s economy had already been sliding, albeit much more modestly. The escalating brinksmanship between Greece and its creditors, among other factors, prompted fears of a Greek exit from the euro and withdrawals from Greece’s banks.

Who's To Blame?

But blame for the events that increased the strain on the Greek economy -- and indeed, some details of the events themselves -- is a matter of heated debate. 

Pagoulatos, and other critics of Greece’s ruling Syriza party, have said that if the Greek government had acceded to its creditors’ key demands earlier, it could have spared the country major economic harm.

Pagoulatos was especially critical of the government for calling the July 5 referendum vote on what was then the creditors’ latest proposal. He said it should have known that the announcement would cause a bank run that not even the European Central Bank had the power to stop.

“There are responsibilities on the side of the creditors for not giving the government enough space in the negotiations and not allowing them more things to bring as small wins,” Pagoulatos said. “But the main responsibility is with [Greek prime minister Alexis] Tsipras for calling the referendum and breaking negotiations. That is what caused the capital controls.” 

Doyle, Mody and other analysts, who are more sympathetic to the Greek government’s predicament, emphasized that Syriza inherited more than four years of failed austerity policies. By the time Syriza assumed power this year, Greece’s economy had already contracted by some 25 percent since 2008, defying years of optimistic growth projections by the IMF. If Syriza’s decision to seek fundamentally better terms for Greece created short-term uncertainty, they reasoned, that posed fewer risks than keeping the status quo.

Perhaps most importantly, these analysts said Greece’s creditors used their institutional power to punish the Greek government economically for challenging them. The European Central Bank’s decision not to increase its emergency assistance to Greek banks after Greece announced a referendum, they argued, was the culmination of a series of political moves by the bank that undermined the Greek banking system, beginning with its decision in February to restrict credit to the newly elected Greek government.

“The ECB officials made some not-so-veiled public threats of cutting Greece off starting in February,” Mody said. “There is a record of that. The bank runs started well before the referendum.”

Powerful Interests May Resist 

Regardless of one’s perspective, however, the Greek government has reasons to focus on the lower surplus targets. Other elements of the deal are far more controversial.

Greece must complete 35 specific economic reforms to receive the promised financing, something Nick Malkoutzis, editor of economic and political analysis for Greek news site Macropolis, called a “tall order.” The government’s administrators will have to work overtime to make dramatic changes in a narrow window of time. And many measures they must implement, like ending fuel subsidies for farmers, affect politically powerful interest groups.

“These have always been the most difficult to implement, rather than ‘horizontal’ measures that affect most of the population, because members of parliament begin to fear strong reactions in their constituencies and governments decide the political cost is too high,” Malkoutzis said.