In Stratfor's 2017 Annual Forecast, we wrote that the Greek government would insist on debt relief and reduced austerity measures but that progress on the issue would be modest because of resistance from Germany. That the Greek government is already preparing for talks with its creditors suggests how vital both issues will be for the country next year.
Relations between Greece and its creditors have been cordial of late. Greece has been receiving bailout funds in recent months without any significant problems. But with the third bailout program set to end in mid-2018, both parties are preparing for early talks about what comes next. According to several newspapers and Stratfor sources, the end of the program won't be as "clean" as it was for other bailout countries Ireland and Portugal because Greece will probably continue to need financial assistance. Greece's future support, however, won't necessarily take the form of a fourth bailout program linked to tough economic reforms. Questions about just what form the support will take — and how they're answered — could present challenges for Greece next year.
It's unclear whether Greece can even function without external aid. The country has been on financial life-support for almost a decade, even after drastically cutting spending and reducing its deficit. The Greek economy is growing again, and the Greek central bank is projecting gross domestic product to increase by 1.7 percent in 2017 and by 2.4 percent in 2018. But the creditors are worried that the gains will not be enough for Greece to grow out of its debt, which is still roughly 180 percent of GDP. Creditors also fear that without external pressure, Athens may stop introducing reforms to the structural problems in the Greek economy that remain unaddressed.
As a result, creditors could pressure Athens to sign a new financial agreement — possibly in the form of a precautionary credit line or an extension of the current bailout program with relaxed terms — to maintain some oversight over Greek policies. Under this scenario, the Greek government would have to find a way to sign the agreement without paying a political price with voters ahead of 2019 general elections. The German government has recently showed interest in transforming the eurozone's bailout fund into a European Monetary Fund, which would be in charge of extending credit lines to eurozone countries in exchange for monitoring their policies. Should the institution be created next year, Greece could be its first client.
It's also unclear what kind of debt relief Greece would ultimately attain from its creditors. The governing Syriza party has promised voters that painful austerity measures would help the party obtain debt relief in the future. The European Union probably won't accept a debt writedown, but Athens would like to at least be given a grace period for repayment, longer maturities, and lower interest rates. This would be controversial in Northern Europe, particularly in Germany. The German government, after all, is undergoing contentious coalition talks that include the pro-business Free Democratic Party, which opposes aid programs for Greece.
After years of financial and political crises and three bailout programs, Greece wants to say goodbye to its creditors. But while the worst seems to be over, the Greek government still may not be able to go it alone.