Déjà vu: More Bailouts for Greece

August 19, 2015Greeceby Deena Zaidi

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Third time's a charm for Greece.

Greece’s third bailout package is on its way for delivery. The new rescue package of $95bn stands debated in the German parliament and is up for a vote before August 20. While the IMF stands aloof amongst all this upheaval, global reception to the third bailout package has not been good.

The biggest contributor to European Stability Mechanism (ESM), Germany faces many parliamentarians, who reject the idea of additional bailouts to Greece. Of German Chancellor Merkel’s 311 members, an estimate of 100 officials might vote “No”. Undoubtedly Greece’s massive debt is unsustainable and repaying this amount of debt is raising many doubts in the minds of its creditors. German conservative critics maintain that a lot of taxpayers’ money has been watered down to Greece and the result remains unchanged.

The Syriza government had strongly opposed austerity during Greek elections early this year and so Prime Minister Alexis Tsipras’s commitment to the bailout conditions remains doubtful. But Greece is taking stringent steps to ensure that it remains in the Euro. In exchange for the bailout, Greece has agreed to sell 14 regional airports to Fraport Slentel, a top German airport operator. It is the first privatization deal under the new government and the biggest privatization deal in Greece since beginning of the crisis and the bailout programs in 2010.

With the third bailout, Greece will feel immense pressure to write-off its outstanding debts from the members of Eurozone and international creditors. Incase of any future defaults or more bailouts, Greece might not be assured a place in the Eurozone. International agencies are already losing their patience and trust in repayment of loans by Greece.

By not participating in the loan agreement talks, the IMF has clearly shown its disagreement in extending further support to Greece. By delaying the repayment dates and providing more financial support, the future of Greece looks dismal. In a press release by IMF on August 14 2015, Managing Director of the International Monetary Fund (IMF), Ms. Christine Lagarde stated, “Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own.” Greece has time and again been portrayed more of a victim in the Eurozone but the truth remains that Greece has overlooked its falling economy since 2004.

* Misrepresentation in the Eurozone: When Greece became the 12th member of the Eurozone, several critics were of the opinion that the weaker economies in the Eurozone could make the stronger ones suffer. In 2004, Greece admitted to have misrepresented its budget figures so as to remain in the Eurozone. As a member of the Eurozone, it was compulsory to restrict its deficit to 3 percent of GDP and its debt to 60 percent of GDP. Greece kept spending more than its capacity leading the economy to huge deficits under increasing layers of debt.

* Contagion Effects due to 2008 Financial Crisis: In addition to falsifying figures to get an entry in Eurozone, the economy of Greece suffered due to the financial contagion in 2008. In 2010, it was granted billions of dollars by the European Union and IMF. In return, they were asked to increase taxes and curb the spending. This in resultantly made unemployment and living standards worse than before. Greece was left with two options: Bailouts or Austerity.

* Rising Tax Evasion: While Greece had much debt than it declared, the economy suffered from a problem of tax evasion. According to an estimate by three economists, the size of tax evasion in Greece was roughly one-third of the country’s budget shortfall in 2009. In addition, an average Greek citizen has approx. 1.92 times more income than reported officially. 

* Political Instability: Greece’s political scenario has been unstable for a while and even though many pinned their hopes on the promises made in January elections, not much seems to have changed. Since the election of Greek Prime Minister Alexis Tsipras, many promises remain unfulfilled. A party against austerity is finding solidarity in bailouts and debt repayment extensions. Having said that many are of the opinion that Prime Minister Alexis Tsipras is efficiently detailing the bailout package, even though there are signs of fractures within the Syriza party.

Eurozone growth has been patchy.  A majority of the member countries of the Eurozone are extending Greece support. With the third bailout, the risk of Greece defaulting on its private sector debt obligations is reduced but political instability and high unemployment remains a concerned issue. On a positive note, Fitch raised its rating on Greece’s debt from ‘CC’ to ‘CCC’ and with a third bailout, Greece now needs to focus in restoring some trust amongst its creditors and the public, in general.