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Oct 22, 2015 | 13:48 GMT

10 mins read

The Greek Crisis: October 2015

(Stratfor)

Editor's Note: Greece is a country in crisis. Facing financial, political and social uncertainty, Greece's ruling Syriza party has cut a deal with the European Union which should keep the Greek economy afloat at least for the time being. But European institutions and prominent member countries such as Germany are near the end of their patience, and it is far from certain that the conditions of the deal will be followed through by the Greek side. The situation is precarious, and it is highly possible that the agreement will collapse. Stratfor is logging the latest developments in this crisis update.

Oct. 22: Greece Kicks Off Its Next Phase of Rescue and Reform

This is a week of important visits for Greece, with the troubled Mediterranean nation holding negotiations on multiple fronts. On Oct. 21, Greek officials started discussions with the country's creditors in Athens, kicking off a process that Greece hopes will lead to the disbursement of the next tranche of financial assistance. On Oct. 22, French President Francois Hollande will arrive in Athens for a series of highly symbolic meetings, during which Greek Prime Minister Alexis Tsipras will seek French support for his push to restructure Greece's debt.
 
Greece's conversations with the creditors will be tough. On Oct. 16, the Greek Parliament approved a legislative package containing many of the reforms requested by the lenders, including measures to increase the retirement age in Greece. But the creditors say around two-thirds of the prerequisites demanded of Greece have yet to be implemented. While most of these measures do not require a parliamentary vote, the Eurogroup of EU finance ministers is concerned about Athens' willingness and ability to enforce whatever reforms Greek lawmakers approve.
 
Greek officials said one of the main topics of the Oct. 21 negotiations was the issue of home evictions. According to existing regulations, the primary residences of low-income mortgage holders cannot be seized. But the creditors are asking Athens for faster evictions, including among low-income homeowners behind on their payments, to accelerate the process of cleaning the banks' portfolio of bad loans. This is a very sensitive issue in Greece, where a relatively high rate of home ownership (around 70 percent) is one of the few social safety nets still in place. Widespread evictions of homeowners could generate significant social unrest.
 
The creditors have been pressuring different Greek governments for faster evictions since the beginning of the Greek crisis six years ago, but Greek politicians have little room to make concessions on the issue. Athens and its creditors will probably find some middle ground, but a drastic change of the current policy should not be expected. The upcoming talks will probably focus on the health of Greek banks, since Athens is working on measures to recapitalize its banking sector. Greece is in a rush to receive money from the eurozone for the banks before new EU rules on bank bailouts come into force. Starting in January, shareholders and potentially creditors will be forced to take losses if a bank requests state aid.
 
Meanwhile, a meeting by eurozone deputy finance ministers to discuss Greece has been postponed, confirming that the broader evaluation process of Greece's bailout has been delayed. At this point, the negotiations between Athens and its creditors remain cordial, and the quartet of institutions (the European Commission, the European Central Bank, the European Stability Mechanism and the International Monetary Fund) are willing to give Greece extra time to comply with its list of reform requirements. In fact, on Oct. 22, European Commission Vice President Valdis Dombrovskis said Greece should receive 2 billion euros ($2.3 billion) by the end of the month. Athens should receive a follow-on disbursement of 1 billion euros after a new round of reforms, which include ending tax breaks for farmers.
 
But with the German government already under intense domestic pressure over Europe's refugee crisis, Berlin's patience with Athens will not be unlimited. In the coming days, Greece will probably promise to improve border controls and make additional efforts to prevent migrants from traveling further into Europe in exchange for a softer approach in the bailout negotiations. But Athens' actions will be constrained by the overwhelming number of asylum seekers arriving in Greece. The country needs to allow some of them to go elsewhere in Europe to ease the domestic and financial pressures of the migration crisis.

With a Little Help From My (French) Friends

In this context, Hollande's visit is particularly important. France was one of the few eurozone countries that pushed to prevent a “Grexit” from the eurozone during the tough negotiations over the third bailout program. French officials helped Athens bargain with Berlin and participated in the drafting of proposals for economic and institutional reform. During a joint speech at the European Parliament in early October, Hollande said the eurozone should discuss the need to restructure Greece's debt. This makes Paris a key ally for Athens, especially since the promise of debt restructuring will be one of Tsipras' main arguments justifying his government's need to pass tough economic reforms in the coming weeks and months.
 
France has its own reasons to support Greece. As both a Mediterranean and a northern European country, France sees itself as the natural interlocutor between southern and northern Europe. As its economic decline weakens its political role in the European Union, France wants to keep a sphere of influence to counterbalance Germany's lead in northern Europe. It comes at no surprise then that German Finance Minister Wolfgang Schaeuble recently revealed that only France, Italy and Cyprus wanted Greece to remain in the eurozone during the bailout fight in June and July.
 
France is also interested in keeping a good rapport with the Greek government for financial reasons. In the coming months, Greece will have to undergo a process of privatization of state-owned companies, and French investors could benefit from their government's strong ties with Athens. Indeed, Hollande will be accompanied by several French businessmen, confirming Paris' interest in the privatization process. With Russian and German investors likewise expressing interest in different Greek companies, France does not want to be left behind in the scramble for Greek assets. This will likely be a long race, however, because Greek privatizations are notoriously slow and complex.
 
Despite the warm bilateral relationship, France faces stiff constraints when it comes to helping Greece. While Paris will probably be more lenient than Berlin in its assessment of Greece's compliance with the bailout program, the Elysee will try to avoid a clash with the Germans and only support debt restructuring measures after the Greeks make additional progress in reforming their economy.

Oct. 8

The new Greek government has been finalized and can begin to make some tough changes to the country's economy. On Oct. 8, the administration won a confidence vote in the Greek parliament, the final hurdle it had to clear before it could begin to govern. As expected, Greek Prime Minister Alexis Tsipras received the backing of his Syriza party and its junior coalition partner, the Independent Greeks, which jointly control 155 of the parliament's 300 seats. The event marked the end of the transitional period that began in late August, when Tsipras called for early elections. Now, Athens will shift its attention to passing a series of controversial reforms needed to honor the terms of Greece's bailout program.

To do so, Tsipras will likely implement a two-step strategy. First, he will use the remainder of the year to push through just enough reforms to obtain the next tranches of financial assistance. These reforms include the introduction of tougher legislation against tax evasion, the elimination of energy subsidies for the industrial and agricultural sectors, the limitation of early retirement schemes as well as the completion of pending privatizations. Tsipras' immediate goal is to receive 3 billion euros (about $3.4 billion) in bailout funds and as much as 25 billion euros to recapitalize Greek banks by the end of December.

The second step of his strategy is to convince Greece's creditors to open negotiations on plans to reduce the country's debt burden. Over the past few weeks, several EU officials have suggested that Greece should be given longer maturities, lower interest payments and a grace period in its debt repayments. On Oct. 7, France sent a positive signal to Greece when French President Francois Hollande said in a joint speech with German Chancellor Angela Merkel that Paris supports the idea of negotiating the future of Greece's debt.

But Tsipras will encounter many obstacles as he tries to realize his plan. The Greek economy will continue to contract in 2016, increasing the likelihood of social discontent and opposition to austerity measures. For the next few weeks, Tspiras can still harness the wave of support he received in the wake of his Sept. 20 electoral victory to pass reforms. But as the country's crisis lingers, popular pressure will force the government to slow the pace of reform in 2016, which in turn could create problems for Tsipras' small parliamentary majority as lawmakers begin to oppose unpopular reforms.

Athens will have a similar experience when dealing with its creditors. For the rest of the year, the Eurogroup will be willing to support the newly elected government, and Tsipras will not face any especially serious problems on that front. While there will probably be some delays in the review of Greece's bailout program and the disbursement of money, they should not put the country in any danger. But the creditors' patience will eventually run out. As Stratfor predicted, the Eurogroup chose to break Greece's bailout into a series of small tranches linked to reforms, which could then be broken into even smaller sub-tranches. For example, the bloc will disperse the next tranche of 3 billion euros in two smaller sub-tranches within the next three months. The scheme, which is meant to keep Greece on a tight leash, will probably create problems in 2016 as Athens slows the pace of reform and its creditors become increasingly nervous.

Next year, three countries will be key players in the Greek negotiations: Germany, the Netherlands and Finland. Each of these governments is under pressure from domestic conservative forces to adopt a hard line with Greece — pressure that Europe's ongoing immigration crisis has only made worse.

In Germany, some members of the ruling party have criticized Berlin's management of both the Greek bailout and the immigration crisis. Meanwhile, in Finland, these issues have created significant political friction within the Finns Party, a Euroskeptic party that is currently a member of the country's governing coalition. The immigration crisis has also renewed support for the Netherlands' opposition Party for Freedom, which is generally skeptical about financing Athens. Pressure from these conservative forces will likely push the German, Dutch and Finnish governments to get tough with Greece.

Even if Tsipras manages to overcome these political issues, the Greek economy will remain fragile for the foreseeable future. The International Monetary Fund recently reported that Greece will not meet its previously anticipated primary surplus of 0.5 percent of GDP in 2016. The institution went on to suggest that Athens introduce additional measures of 1.35 billion euros in 2015-2016 to meet the bailout targets. The IMF expects the Greek economy to contract by 2.3 percent this year and to shrink again in 2016 by 1.3 percent. More important, it also expects Greek unemployment to continue growing next year. As a result, Greece will likely experience a period of relative calm in the next quarter, but the troubled Mediterranean nation's problems will undoubtedly return with the start of the new year. 

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