Waiting for G-Day
With a final decision on Greece fast approaching, what is the worst-case scenario: bailout or Grexit?
G-Day is coming: Greece’s future will be decided on Sunday. The government has requested a new €53.5bn bailout loan, promising in return structural reforms and fiscal austerity. The referendum result should make it more difficult for the Greek government to agree to conditions similar to those that were voted down. Meanwhile it gives a reason for official lenders to let Greece leave the euro area if a new agreement is not reached.
Nevertheless, I still regard an agreement as likely and expect the Greek government to accept conditions in exchange for some easing of the debt burden – perhaps through extended maturities and grace periods, deferred and slightly lowered interest rates, or possible GDP-indexing. The agreement should focus on growth-enhancing structural reforms and limiting corruption and tax evasion. A lasting and implemented agreement will likely restart growth. While the adjustment of other EU countries with similarities to Greece (Portugal, Spain and the Baltics) was painful, all of these countries have returned to growth and job creation. Even Greece started to grow in 2014 and new jobs were created in every quarter of that year, although this badly reversed in the past six months. Still, even if an agreement is reached, lifting capital controls will take a long time. It cannot happen until trust in the banks is restored, which depends on the implementation of the programme, disbursement of tranches and the restoration of normal cooperation between the Greek government and its lenders. In Cyprus, controls were promised for a few weeks but lasted for two years.
Lack of an agreement on Sunday will lead to Grexit, which would be extremely painful for Greece: a further major fall in Greek GDP and employment, and the loss of savings. The resulting lower tax revenues would necessitate further fiscal austerity even if the government stops completely servicing public debt. For the EU and the IMF an exit would likely mean writing down official loans to Greece and ECB lending to Greek banks. A Grexit would make the remaining euro area more vulnerable. Whenever the public finances of another government would come under stress, markets may bet on that country also exiting the euro area.
So, I keep my fingers crossed for an agreement and its implementation.
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