The Greek Crisis: August 2015

19 MINS READAug 31, 2015 | 00:00 GMT
The Greek Crisis: August 2015 (DISPLAY)

Editor's Note: Greece is a country in crisis. Facing financial, political and social uncertainty, Greece's ruling Syriza party has been trying to cut a deal with the European Union to keep the Greek economy afloat. But European institutions and prominent member countries such as Germany are reaching the limits of their patience when it comes to tolerating Greek debt. Something has to give, and Athens is in an extremely vulnerable position. Stratfor is logging the latest developments in this crisis update.

Aug. 26

Less than a week after outgoing Greek Prime Minister Alexis Tsipras announced his resignation, the country's political landscape is still fragmenting. At the heart of the deteriorating political situation is the collapse of Greece's ruling Syriza party. Former Energy Minister Panagiotis Lafazanis and parliamentary Speaker Zoi Konstantopoulou, both former Syriza members, have each announced plans to create their own parties. Meanwhile, several of Syriza's central committee members tendered their resignations Aug. 26, and some members of Tsipras' former Cabinet have said they likely will not run for office again in the country's upcoming elections.

The splintering of the ruling party will in all likelihood hurt Tsipras' performance in elections set for the end of September. The Greek leader called for early elections in the hope of ridding himself of the most radical members of his party, allowing him to form a more cohesive government. This strategy made sense at the time, since Tsipras remains the most popular politician in Greece and stands a good chance of being re-elected. However, the successive defections within Syriza will probably siphon votes away from the party. Even though the new offshoots likely will not perform well in the elections, Tsipras will need as many seats in Parliament as possible to form a working government that is capable of implementing Greece's agreement with the European Union.

Still, the departure of Syriza's more radical members may give Tsipras the chance to rebrand himself as a moderate leader. Like most of his adversaries, including the center-right New Democracy, centrist Potami and center-left Panhellenic Socialist Movement, Tsipras is pro-euro in a country where most citizens wish to remain in the currency zone. However, unlike most of his rivals, Tsipras is still perceived as an anti-establishment leader. For now, Tsipras will probably focus his campaign on keeping Greece in the eurozone while fighting corruption and dismantling the country's vested interests. The fact that the opposition is weak and lacks charismatic leaders will ultimately work to his advantage.

The main problem Tsipras will have to confront after elections is that Greece's political fragmentation will make the prospect of forming a single-party government nearly impossible. When he called for early elections, Tsipras likely planned to form a two-part coalition featuring Syriza as the dominant political force. But while a coalition government is probably still in Greece's future, it may not be formed under the terms Tsipras expects. Greece might be left with a multiparty government that is even more fragile than the one that emerged from January's elections. Like its predecessor, Greece's next government will be forced to grapple with internal friction as the country begins to implement the unpopular bailout measures.

Greece's creditors are undoubtedly concerned about the situation in Athens. Several EU officials have gone out of their way to provide assurances that early Greek elections will not derail the bailout program. From their perspective, the fact that most Greek political parties support the agreement means that the reforms stand a good chance of being approved by Parliament, regardless of what coalition is in power.

But this assumption is only partially true. While most Greek parties do indeed support the bailout, internal disputes will slow the implementation process. Depending on the degree of political fragmentation in the wake of elections, coalition talks could take weeks, which might cause Greece to miss its deadlines for reform. If this happens, it could create problems for the governments of several Greek creditors, including Germany, Finland and the Netherlands. Because these governments are already facing skepticism at home regarding the bailout, they may be pushed to take a hard line during multiple reviews of the deal.

Greece may yet be able to delay or even avoid some of these issues. The country is set to hold elections in late September, before creditors' October review of the bailout. If Greek parties manage to form a government in time, they may be able to agree to just enough reforms to pass the first review. But with reviews taking place every quarter, any coalition government faces the risk of losing its cohesion quickly. Even in the best-case scenario, where speedy coalition talks lead to the formation of a new government before the October review, the next Greek government will be as fragile as its predecessors.

Aug. 19

Greece's third bailout program overcame a crucial hurdle Aug. 19, when the German parliament ratified the agreement. During a special session, 454 lawmakers voted in favor of the deal, while 113 voted against it and 18 abstained. Germany's approval of the bailout means that Greece will probably start receiving funds from the European Union in the coming hours. The political situation in Athens, however, is as volatile as ever.

The Greek bailout is controversial in Germany, and it took a lot of work on the part of German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble to convince conservative lawmakers to support it. Both politicians reassured members of parliament that the International Monetary Fund (IMF) will eventually participate in the program and that they would not authorize any write-downs of Greek debt.

Berlin has a dilemma: It wants the IMF involved in the Greek bailout, but it also wants to avoid forgiving Greece's debt. For months, the IMF has demanded a restructuring of the debt, which it considers unsustainable. Germany and other eurozone countries disagree, and, because of the conflict, the IMF will not participate in the initial phase of Greece's bailout program.

However, as Athens and eurozone finance ministers neared a deal, Berlin softened its position, admitting that Greece's debt is unsustainable and offering its own solution to Greece's woes: longer maturities and lower interest rates. This, German officials hope, will convince the IMF of the European Union's commitment to debt relief for Greece and will move the institution to join the bailout later in the year.

The Aug. 19 session at the Bundestag will probably be the last vote related to Greece in a long time, which means that Merkel will have plenty of time to heal the wounds in her party. But it will not be the last time Merkel has to make difficult choices related to Greece: In October, the eurozone will have to assess the progress of the bailout program and start discussing debt relief with Athens. In addition, the bailout has been broken into multiple tranches linked to reforms. Each time the eurozone has to release new money for Greece, conservative lawmakers will pressure Merkel to take a hard stance on Athens.

Opposition to the third bailout is even stronger in Greece, where Prime Minister Alexis Tsipras is dealing with resistance from within his own party. During a vote to ratify the deal at the Greek parliament, government lawmakers' support for Tsipras fell below the minimum number of votes required to survive a potential confidence vote.

As a result, Tsipras is considering calling for early elections. This may sound strange to outside observers (the last thing Greece needs right now is more political uncertainty), but the prime minister is counting on new elections to produce a more cohesive government. For weeks, Tsipras has depended on support from the opposition to pass legislation, but this support will not last indefinitely. In addition, most of the rebel parliamentarians will probably not change their mind any time soon — especially if the dissidents follow through with their recent threat of creating a new party. Early elections would enable Tsipras to be re-elected on a clear pro-reform platform and to build a new government without the rebels. Despite the Greek crisis, Tsipras is still the most popular politician in Greece, and the main opposition parties are weak and fragmented.

To a certain extent, Tsipras is still in control of his fate. The Greek government could be overturned in two ways: through a vote of confidence initiated by the prime minister or a motion of censure initiated by the opposition. The opposition is unlikely to issue a motion of censure because it is not ready for elections. Greek officials have said Tsipras will call for a vote of confidence after Greece makes its payment to the European Central Bank on Aug. 20, and it would only take a couple of abstentions from the opposition and a couple of votes from undecided Syriza lawmakers for Tsipras to survive a confidence vote. But this will not solve any of Tsipras' problems, because his government would still be fragile and divided. Ironically, Tsipras may decide to hold a vote of confidence hoping to be defeated, because this would justify the organization of early elections.

The timing of a potential vote of confidence is important. Some of the most painful austerity measures will be implemented in October, when Athens has to lift tax benefits for farmers and increase taxes for households. Tsipras could decide to hold elections in late September, which would allow him to campaign before the unpopular measures are introduced. Tsipras could also decide to hold the vote in November or December, hoping to receive a promise of debt relief from the creditors after the first review of the bailout. Considering that Athens has to meet tight deadlines for reform if it wants to continue receiving money, Tsipras is likely to delay the elections until after the first review of the program.

The bailout is structured in such a way that Tsipras' popularity is bound to erode and the Eurogroup is going to have to make multiple decisions on whether it can continue to release additional funds. The memorandum of understanding says the creditors have the right to update the requests for reform with each review, which means the negotiations between Athens and its creditors will be constant. German parliamentarians will remain skeptical of Greece's desire to reform, while politicians in Athens will try to mitigate some of the reforms they recently promised to introduce. Even though Greece has received Germany's reluctant support, political constraints in Berlin and Athens will continue to create multiple crisis points down the road.

Aug. 14

Greek Prime Minister Alexis Tsipras gained another bittersweet victory Aug. 14, when eurozone finance ministers approved a bailout program for the Mediterranean nation worth 86 billion euros (95.5 billion dollars). The program will include around 25 billion euros to recapitalize Greek banks. According to the deal, Greece will receive 26 billion euros in the coming days, with additional funds to be disbursed in tranches over a three-year period. The agreement has yet to be ratified by several eurozone parliaments, most notably the German Bundestag, which will vote on it early next week.

Despite the positive signals coming from Brussels, Tsipras is facing an extremely complex situation at home. Stratfor’s third-quarter forecast predicted that, "the Greek government under Syriza is likely to fall, either from a banking crisis or from a rebellion within its own ranks upon signing a deal." On Aug. 14, the second of these two scenarios began to materialize when the Greek government approved the memorandum of understanding for the third bailout, but Tsipras lost significant support from members of his own party.

During the vote, 43 Syriza lawmakers opposed the deal or abstained, forcing Tsipras to once again depend on the opposition to approve the agreement. While Tsipras has faced rebellion from within his party ranks in the past, the Aug. 14 vote is crucial because only 118 government lawmakers voted in favor of the bailout. According to the Greek Constitution, governments need a minimum of 120 votes to survive a motion of confidence. On Aug. 13, rebel Syriza lawmakers called for the creation of a "front" against the bailout.

This puts Tsipras in a vulnerable position. Over the past month, he has depended on the opposition to pass legislation required from the European Union. From now on, however, he might require support from the opposition to even keep his post. If an opposition party calls for a motion of censure, the prime minister might not survive.

Scenarios for a Vote of Confidence

Syriza members said Tsipras would call for a vote of confidence in his government after Aug. 20, when Athens has to pay around 3.2 billion euros ($3.55 billion) to the European Central Bank. By doing this, Tsipras would force Syriza lawmakers sitting on the fence (11 lawmakers abstained during the Aug. 14 vote) to define their position. It would also force the moderate opposition to state clearly whether it wants early elections. Despite the Greek crisis, Tsipras is still the most popular politician in Greece, and he stands a good chance of being re-elected. The prime minister is counting on the fact that the opposition does not really want early elections.

Greece’s current situation could now give way to one of four main scenarios:

  1. Tsipras could decide not to call for a vote of confidence and continue to rely on the opposition to approve the reforms included in the bailout program. This option is dangerous because Tsipras' government would continue to hang by a thread.
  2. The opposition could back Tsipras in a vote of confidence or a motion of censure. Even if this were to take place, Tsipras would not be completely safe, and any disagreement with the opposition could cause his government to fall. This situation would also force the opposition to openly support Tsipras. In recent days, moderate parties have said that they support the bailout but not the Syriza government.
  3. Tsipras could convince undecided Syriza lawmakers to support him and the opposition to abstain or to not be present during a vote of confidence. This would make things somewhat easier for the opposition because the moderate parties would not be forced to openly support Tsipras. This would also give the opposition more time to start preparing for potential elections later in the year.
  4. Tsipras could fail to win support from the opposition and the undecided lawmakers. This would lead to his defeat in a vote of confidence and the call for early elections.

These four scenarios have a common characteristic: political fragility. Under the first three scenarios, Tsipras would remain in power for a few more weeks or months. Under the fourth, he could lose his job by the end of August. In either case, Stratfor's forecast remains unchanged: Greece is headed toward early elections for the simple reason that the current political situation is unsustainable.

The timing of the elections is important. The Eurogroup has suggested that Greece’s bailout program should be reviewed in October. If the creditors issue a positive assessment of the evolution of the program, the lenders would be willing to start discussing debt relief. The best-case scenario for Tsipras is to call for early elections after the October review, for two reasons. First, after October, Greece would probably have three more months before the next program review, which would allow Athens to slow the pace of reform during the electoral campaign. Second, Tsipras would be able to campaign on a promise of debt relief.

The worst-case scenario for Tsipras would be to have to mount an electoral campaign before the October review. Under this scenario, Tsipras would be both campaigning and introducing painful austerity measures. The creditors, in the meantime, would be dealing with a government in Athens that could be voted out of office in the immediate future.

A Fragile Deal

The Greek government recently celebrated the fact that the memorandum of understanding allows Athens to achieve lower fiscal surplus targets than originally discussed. But since the Greek economy is expected to continue to contract in 2015 and 2016, even the new and relatively soft fiscal targets will be hard to hit. In addition, the creditors recently admitted that even if Greece were to successfully implement the program, the country's debt would only fall below 120 percent of GDP in the 2030s. (This is the threshold at which Greek debt would become sustainable, according to the International Monetary Fund.) The IMF will consider whether it will participate in the program later in the year. This could be problematic, because it is pushing for debt write-downs for Greece, something that Germany and others oppose.

Even if the Eurogroup and, more important, the German Bundestag ratify the third bailout, the Greek crisis will continue. Berlin is skeptical of Athens' ability — and willingness — to implement the ambitious reforms described in the memorandum of understanding. As a result, the creditors will break the bailout into several tranches, directly linked to a timetable for economic and institutional reforms. This will continue to generate friction between Athens and its creditors, which means that the program could be abandoned at any point in the next three years.

Aug. 11

After two weeks of negotiations, Greece and its creditors reached a deal on the terms of a three-year bailout on Aug. 11. According to Greek Finance Minister Euclid Tsakalotos, only a few “small details” still need to be discussed before the agreement can be formally announced. Athens’ goal is to get the deal approved by the Greek Parliament by Aug. 13, in the hopes that the Eurogroup will ratify it by the end of the week. After that, several eurozone parliaments, including Germany’s, will then need to approve it. The deal will likely make it through this process.

Greece is hoping to receive some rescue funds by Aug. 20, when it has to repay a loan worth some 3.2 billion euros (around $3.52 billion) to the European Central Bank, but it is still unclear how much money Athens will receive and when. The overall size of the third bailout program is roughly 86 billion euros, but the money will be disbursed in multiple tranches. Greece would like to receive a first tranche of some 25 billion euros in time to make the ECB loan repayment, recapitalize Greek banks, and repay the bridging loan the country received in July. The final size of the bailout will also depend on whether the International Monetary Fund decides to participate, which could happen later in the process. The IMF has said it will only participate if Greece is given debt relief, a concession some eurozone members are not yet willing to make.

The agreement is the result of a few compromises by the creditors and several concessions by Greece. The list of “prior actions” that Athens has to introduce before it receives any money includes: phasing out early retirement, raising taxes for Greek islands, eliminating fuel subsidies for farmers, introducing new taxes for shipping firms, and establishing a timetable for the privatization of state-owned companies. The creditors, in return, will accept lower fiscal targets for the Mediterranean nation and let Athens introduce some reforms later in the year — including a controversial review of collective bargaining mechanisms and collective dismissals.

The most immediate result of the deal is that Greece will remain in the eurozone and avoid a default — at least for a few more months. Greek Prime Minister Alexis Tsipras lost support from a sector of his ruling Coalition of the Radical Left, or Syriza party, but he is counting on moderate members of the opposition to ratify the third bailout. This means that the Greek Parliament should ratify the deal. The German government remains very skeptical of Greece’s ability to live up to the terms, but Berlin will probably support the agreement anyway. Germany wanted Athens to request a short-term bridging loan to buy time to continue negotiations. From the German point of view, the thoroughness of the agreement is more important than the speed with which it is implemented. But the French government and the EU Commission pushed decisively for a formal bailout program now. As a result, the Greek bailout will do little to ease the frictions among Berlin, Paris and Brussels

The current state of political concord will not last. In late July, Tsipras temporarily defused a rebellion within Syriza by calling for a party congress in September. The congress will probably reinforce Tsipras’ leadership of Syriza and cement support for the bailout program, but at the cost of formally splitting the party. The prime minister will likely decide to hold early elections while his popularity remains high, which means that the Greek government could find itself in the middle of an electoral campaign while still attempting to pass controversial policies. Germany and other northern eurozone governments will continue to push for reforms, because the bailout will link the disbursement of money to a strict timetable of measures.

More important, the agreement leaves some important questions unanswered. Debt relief, for example, remains the elephant in the room. By accepting a third bailout, Tsipras abandoned most of his campaign promises. For him, obtaining a concrete promise of debt relief from the creditors would be a significant victory that would somewhat soften the political and social pain of introducing additional austerity measures. Thus, Athens will continue to push in this direction.

However, Greece will probably not obtain such a promise, at least until late November or early December. The German government wants to see progress on some of the reforms before discussing debt relief. Portugal and Spain will probably refuse to discuss the issue until after each hold its next general election (in October and either November or December, respectively). In addition, though it may somewhat lighten the load on government finances, the “extend and pretend” strategy (offering longer maturities and lower interest rates for Greece’s debt) will not in itself reduce Greece’s debt-to-GDP ratio, especially since the Greek economy is expected to contract between 3 and 4 percent this year and likely continue to shrink in 2016.

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