In our 2018 Annual and Second-Quarter forecasts, we said that Greece will complete its bailout program this year, but that Athens will remain under light surveillance from the creditors. Greece's current threat to the eurozone is much lower than it was three years ago, but the troubled Mediterranean nation will still present challenges to its euro peers.
As the Greek bailout program approaches its conclusion, Athens and its lenders are starting to think about the future. On March 12, the head of the Eurogroup, Mario Centeno, announced that Greece will receive around 5.7 billion euros ($7.1 billion) in bailout money by the end of the month. More importantly, he said that the lenders will discuss measures to alleviate Greece's massive debt burden during their next meeting in April. The debt relief measures could include a longer repayment schedule, linking debt repayments to Greece's economic growth and giving Athens the profits that the European Central Bank made on Greek bonds. Greece and its creditors are expecting a deal on debt measures to be made by the time the bailout program expires in August.
Relations between Greece and its creditors have improved significantly since the tense days of mid-2015, when clashes put the Mediterranean nation on the brink of leaving the eurozone. This was the result of a combination of factors, including Athens' decision to accept a third bailout package and the European Union's commitment to keeping Greece in the eurozone.
In the months leading to the end of the bailout program, Greece's main challenge will be to negotiate a smooth transition with its creditors while keeping social and political dissent within tolerable margins. Athens has said it wants an end to any external supervision of the Greek economy after August; post-bailout supervision would be unpopular among Greek voters and difficult for the governing parties to digest. But the creditors will request some degree of oversight out of fear that Greece could abandon some of the reforms it has promised in recent months, and Athens understands that this is a realistic price to pay in exchange for debt relief measures. Thus, a compromise is likely. After the bailout program ends, Greece probably will not be under the same tight control it is now, but it will likely accept some light supervision from its lenders.
After the bailout, Greece will need to focus on modernizing its economy and generating sustainable growth. To a large extent, the country's three bailout programs over the past decade have consisted of fiscal adjustment in the form of tax hikes and spending cuts, rather than structural reforms that would make the Greek economy more competitive. So while Greek households and businesses have seen a significant increase in fiscal pressure, the Greek economy has seen little liberalization. This creates a dilemma for future EU and Greek leaders. Without pressure from the union, future Greek governments could abandon reforms or even return to the kinds of populist and clientelistic policies that contributed to the crisis in the first place. But too much European pressure could trigger new waves of nationalist and anti-euro sentiments in the country.
From a purely financial point of view, the risks connected to a Greek exit from the eurozone are lower today than they were only three years ago, in part because most of Greece's debt is in the hands of its institutional creditors. But another Greek crisis would cause more political divisions in the European Union, as assisting Athens is a controversial topic in the bloc and would raise questions about the continuity of the eurozone.