The High Price of Reform in Greece

11 MINS READNov 20, 2015 | 19:37 GMT
People stand outside a branch of a Piraeus Bank branch in central Athens.

People stand outside a branch of a Piraeus Bank branch in central Athens.

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.

Nov. 20

The passage of a new set of economic reforms brought with it another pyrrhic victory for Greece. The reforms enable Greece to receive 12 billion euros (about $12.8 billion) in bailout money – 10 billion of which will be used to recapitalize Greek banks – but passing them cost the government several seats in Parliament.

The reforms were supported by 153 of Greece's 300 lawmakers. Before the vote, Prime Minister Alexis Tsipras asked Gavriil Sakellaridis, a prominent lawmaker and a former government spokesman, to resign because of his opposition to the reforms — a clear sign of dissent within the ruling Syriza party. A Tsipras loyalist replaced Sakellaridis. But more important, a lawmaker from Syriza and a lawmaker from the Independent Greeks, Syriza's junior coalition partner, both resigned before the vote, reducing the government's parliamentary majority from five lawmakers to three.

Before the vote, Tsipras and Panos Kammenos, the leader of the Independent Greeks, pressured the lawmakers from their parties to support the reforms, but there was only so much they could do. They can expel rebel lawmakers from their parties and from their parliamentary groups, but they cannot force them to give up their seats. Many lawmakers oppose the measures requested by Greece's lenders but voted in favor of them to preserve the Greek government.

The situation is unsustainable in the long run, especially since Greece's economic problems remain unsolved. Creditors will continue to pressure Athens to introduce reforms for the next two years. On Dec. 5, the Greek Parliament will vote on the budget for 2016. The budget will impose additional taxes on the Greeks, including income tax, real estate tax, road tax and value-added tax. And by early 2016, Athens is expected to raise taxes on farmers and to cut pensions and wages in the public sector. Considering how unpopular these measures are, they are sure to raise the chances of social unrest and political infighting.

Prudence dictates that Tsipras will probably try to do what his predecessors did: introduce just enough reform to qualify for EU funds while trying to keep political and social dissent within tolerable margins. But with the Greek crisis entering its sixth year – a year that will be characterized again by recession and rising unemployment – that strategy may be more difficult to pursue, especially if more citizens take to the street to protest. Moreover, Greece's creditors may be less inclined to compromise with Athens in the future. The German government, for example, is under pressure from conservative lawmakers who believe Berlin should take an even firmer stance against Greece in future negotiations, even though its behavior in the first six months of 2015 could hardly be described as soft.

But Athens, too, is constrained by its voters. During the Nov. 19 vote, the government introduced last-minute changes to some pieces of legislation, including one that dramatically reduced taxes on wine. Such measures will only complicate negotiations between Greece and its lenders.

Nov. 17: The Insensitivity of Reform

After weeks of negotiations, Greece and its creditors reached an agreement on Nov. 17 that allows the release of the next tranche of the bailout program (2 billion euros, or roughly $2.1 billion) as well as 10 billion euros to recapitalize Greek banks. According to Greek Finance Minister Euclid Tsakalotos, the Greek Parliament will ratify the deal by Nov. 19, and the finance ministers of the eurozone should endorse it the following day.

The agreement shows that despite the fact that the entire calendar of bailout assessments and fund disbursements has been delayed (Greece was supposed to receive the most recent funds in October) and tensions in negotiations persist, Athens and its creditors are still able to reach a consensus. The deal is also important because it includes a plan to deal with the sensitive issue of unpaid mortgages in Greece.

Roughly one in three housing loans in Greece are non-performing, but regulations currently in place protect many families who are behind in their mortgage payments. The creditors delayed the release of new funds to persuade Athens to make it possible for banks to auction a larger number of properties while improving ways to identify "strategic defaulters," the people who are not paying their mortgages because they know Greek law protects them. According to the Nov. 17 agreement, only the most vulnerable 25 percent of households will be protected from eviction, while an additional 35 percent will receive different degrees of protection related to their annual income and the value of their property.

    Prudence dictates that Tsipras will probably try to do what his predecessors did: introduce just enough reform to qualify for EU funds while trying to keep political and social dissent within tolerable margins.

    This is not a minor issue. Greek banks are dealing with some of the highest rates of non-performing loans in Europe, and any plans to restructure the sector will have to address the problem. In addition, the agreement stipulates that Greece has to come up with a plan for non-performing business loans in December. Athens will hurry to use the deal's 10 billion euros to recapitalize its banks as well, because tougher regulations over banking bailouts will enter into force in January.

    But Athens is also interested in protecting vulnerable families from being evicted from their homes. With recession and rising unemployment projected to continue in 2016, Greece is fertile ground for an uptick in social unrest. The Greek Parliament has already passed several of the reforms demanded by the creditors, but many of their effects will only begin to be felt next year. Prime Minister Alexis Tsipras' administration believes a spike in home evictions would only add fuel to the fire, suggesting that Athens will selectively enforce the new regulations, which could renew frictions with the creditors in the long run. It is also unlikely that banks will be interested in auctioning a large number of properties while the housing market remains depressed.

    Discontent with the traditional political parties and exhaustion after years of crisis led to Syriza's electoral victory in January. Even after signing a new bailout deal with the creditors in July, Tsipras managed to be re-elected in September. But he controls a very slim majority in the Greek Parliament, and popular support for the government could erode quickly, especially since 2016 will be as hard a year as any since the beginning of the crisis.

    The creditors are also still relatively flexible when it comes to implementing the bailout program, but delays in assessing Greece's progress also mean delays in the negotiations over Greece's core goal: debt relief. Without formal negotiations to alleviate Greece's debt burden, Tsipras will find it increasingly hard to defend austerity measures. Greece will also have a hard time convincing its creditors to allow the bailout program to be implemented at a slower pace, since political upheaval in Germany will weaken Berlin's ability to maneuver when dealing with Athens.

    As Stratfor said in previous reports, the debt calendar for next year is relatively calm. Greece probably will not be under the same kind of financial pressure it was this year. So, the main threat for the country in 2016 will be social unrest and its political repercussions.

    Nov. 9: Greece: Creditors Delay the Release of New Funds

    After several weeks of relative calm, tension is once again rising between Greece and its creditors. On Nov. 9, eurozone finance ministers decided to withhold the next tranche of Greece's bailout — an estimated 2 billion euros (a little less than $2.2 billion). The ministers argued that Athens is not doing enough to comply with the terms of its financial aid program to receive the next injection of funds.

    As expected, regulations on the repossession of houses from homeowners who are behind on their mortgage payments proved to be the main point of contention. According to Greek law, families whose primary residences are worth less than 200,000 euros are protected from eviction. The country's lenders believe this threshold, which applies to roughly two-thirds of all homeowners, should be lowered.

    But this is a sensitive issue among Greek citizens. A relatively high rate of home ownership is one of the country's few remaining social safety nets. After Greece received its first bailout in 2010, several Greek governments let the issue go unresolved, and the current administration is likely to do the same. Prime Minister Alexis Tsipras will instead try to compromise with Greece's lenders for the same reason he has already tried to avoid implementing a controversial tax hike on private education: to keep social unrest from escalating.

    According to Greek media, Athens' creditors have given the government until Nov. 11 to implement the necessary reforms. The eurozone's deputy finance ministers will then meet on Nov. 13 to decide whether or not to release the next tranche of funds. But since Greece does not have any major payment deadlines coming up in the immediate future, it will try to reach a political agreement with the Eurogroup to either delay or soften reforms.

    Greece may ask France, which has been providing political and technical assistance, for support in its negotiations with the Eurogroup. During the Nov. 9 meeting, French Finance Minister Michel Sapin said Athens and its creditors should reach an agreement, and French officials have been helping their Greek counterparts design and implement reforms that comply with the terms of the bailout agreement. However, French support for Greece has its limits, and it is unlikely that Paris would go head-to-head with Germany and other northern European countries during the assessment of Greece's progress.

    Ultimately, Greece will probably still receive its next bailout installment, but recent events confirm several of Stratfor's broader forecasts. First, the creditors' decision to break Greece's bailout into small tranches has opened the door for delays in the implementation of reforms and permanent tension between Athens and its creditors. Second, the Greek government is continuing to pursue its strategy of introducing as few reforms as possible to qualify for funds. (This trend will only continue as social unrest grows. Greek citizens are already planning to hold a general strike Nov. 12.) Finally, countries in northern Europe, which have political constraints of their own, do not have much room to be lenient with Athens.

    Each of these factors is contributing to the current delay in Greece's talks with its creditors, but perhaps the most important factor stalling progress is that the biggest issue — Greek debt — remains largely unaddressed. Both Athens and international lenders agree that Greece's debt is not sustainable, but each has very different views on how to solve the problem. Additional debt write-downs are not on the table, but even other options such as giving Greece a grace period or longer maturities could be delayed or canceled if negotiations stall. As time goes on, Greece's third bailout agreement will remain in place, but it will become progressively harder to implement.

    Europe's debt crisis may have subsided but it has not disappeared, and countries in Southern Europe are already sending warning signals to the market. In Portugal, anti-austerity forces will probably prevent conservatives from forming a government, and in Spain a fragmented political landscape will likely lead to an unprecedented coalition government. For its part, Greece may not be as potent a threat to the entire eurozone as it was five years go, but, when combined with political developments elsewhere in Southern Europe, instability in the troubled Mediterranean nation could end the period of financial calm that has been in place since the Greek bailout deal was reached in July.

    Update: The Nov. 9 Eurogroup meeting has ended, and Eurogroup President Jeroen Dijsselbloem has announced that the eurozone's deputy finance ministers should meet no later than early next week to determine whether Greece qualifies for the next tranche of funding. Now, Greece's most pressing priority will be to secure the financial aid it needs to recapitalize its banks before Jan. 1, 2016, when tougher restrictions on bailout funds for banks will be implemented.  

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