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As the approach to today’s emergency summit on Greece’s debt crisis becomes a very high priority for European leaders, Greece’s socialist government is retaining its hard line approach.
Greece must repay a 1.6 billion euro loan to the International Monetary Fund next week and any failure to pay could threaten its future in the euro zone currency bloc. Furthermore, its precarious economic position is the result of the culmination of several bailouts which began with a nation of just 11 million having received a 190 billion euro funding, representing one third of the entire capitalization of the European Central Bank, secured on Greek banks as collateral.
Since then, the nation has continued to create debt and has not developed an industrial sector large enough to produce enough output make headway toward economic resurrection, instead relying on handouts from the European Union.
The early this year signaled the direction of the nation, and indeed at the eleventh hour, when Greece’s negotiating position should be one of mitigating its liability, Deputy Labour Minister Dimitris Stratoulis made comments that define the tightrope Prime Minister Alexis Tsipras must walk to reach an agreement that will win over both the creditors and his own Syriza party.
In a report today by Reuters, it was stated that Mr Stratoulis told Antenna television on a morning news show: “I repeat: The deal will either be compatible with the basic lines of Syriza’s election manifesto, or there will be no deal. The prime minister is negotiating with this in mind.”
A run on the banks has already taken place, with $4.5 billion having left the country during this week, however the country could also be forced to impose capital controls within days to stem the outflow of billions of euros from Greek banks.
Should Greece leave the European Union, it is likely that it will not repay any of its debt, therefore exposing the European Central Bank to a liability of one third of its entire capitalization, with the collateral on which the initial loans were secured being rendered completely worthless.
In accordance with Syriza’s anti-austerity approach, Greece will refuse to cut pensions and wages, and rejects lenders’ demands to curb early retirement benefits immediately, however such benefits could be cut at a later date.
Taking a look at the historic events which led to this crucial point, the payment of the original bailout was scheduled to happen in several disbursements from May 2010 until June 2013. Due to a worsened recession and the fact that Greece had worked slower than expected to comply with point 2 and 3 above, there was a need one year later to offer Greece both more time and money in the attempt to restore the economy.
In October 2011, Eurozone leaders consequently agreed to offer a €130 billion second bailout loan for Greece, conditional not only on the implementation of another austerity package (combined with the continued demands for privatisation and structural reforms outlined in the first programme), but also that most private creditors holding Greek government bonds should sign a deal accepting extended maturities, lower interest rates, and a 53.5% face value loss.
This proposed restructure of all Greek public debt held by private creditors, which at that point of time constituted a 58% share of the total Greek public debt, would according to the bailout plan reduce the overall public debt burden with roughly €110 billion.
A debt relief equal to a lowering of the debt-to-GDP ratio from a forecast 198% in 2012 down to roughly 160% in 2012, with the lower interest payments in subsequent years combined with the agreed fiscal consolidation of the public budget and significant financial funding from a privatization program, expected to give a further debt decline to a more sustainable level at 120.5% of GDP by 2020.