Greece’s Financial Odyssey

By | Updated Feb 10, 2017 7:50 PM UTC

Greece fought austerity and austerity won. When Alexis Tsipras, the brash young leader of a left-wing party, became prime minister in January 2015, he vowed to stop taking the economic medicine that shrank the country's economy by a quarter, saw more than a million jobs disappear and drove thousands of Greeks below the poverty line. His European counterparts, who had lent Greece more than 200 billion euros ($215 billion) to prevent its default, had a simple response: no. Six months later, Greece's banks were shuttered, its stock market was closed, the economy was falling back into recession and the country stood on the brink of expulsion from the euro zone. Tsipras blinked, accepting a new, 86 billion-euro bailout on terms harsher than those he had rebelled against. For more than a year, an uneasy peace held between Athens and Brussels, and Greece's place in the euro seemed assured. But in February 2017, a downbeat report by the International Monetary Fund threatened to unravel the 2015 deal, triggering yet another round of nail-biting negotiations.  

The Situation

After Tsipras forced through unpopular austerity measures tied to Greece's third European bailout, attention turned to steps needed to make the country's debt sustainable. In January, the euro-area's bailout fund extended repayment schedules and took other steps to ease the burden. But a month later, the IMF, which is barred from lending to countries unable to repay their debt, said Greece still couldn't meet its target of a primary budget surplus (before interest payments) of 3.5 percent of gross domestic product by 2018, making it hard for the fund to remain as a creditor. Its commitment is also necessary to keep Germany and other states as lenders. Since euro-area finance ministers refuse to grant more relief, creditors are pressuring Tsipras to again cut spending and raise taxes. Tsipras insists he can't, having already increased taxes and pushed through changes dictated by the creditors, ranging from easing restrictions on home foreclosures to pension reforms to removing incentives for early retirement. Tsipras, meanwhile, is losing popular support and upcoming elections in the Netherlands, Germany and other EU countries further complicate any resolution.

Sources: National Statistical Service of Greece, Eurostat

The Background

The victory for Tsipras's Syriza party, an acronym that means the Coalition of the Radical Left, ended a 40-year era in which the conservative New Democracy party and the socialist Pasok party traded power. The parties' competition for votes led to a spending spree financed by international debt while tax evasion flourished. In 2009, Pasok took power and revealed a deficit four times what euro rules allowed. To avoid default, Greece received more than 200 billion euros in European Union and IMF funds. It also forced private creditors to write down 100 billion euros of bonds. In return, the country’s lenders forced deep spending cuts. In June 2015, Tsipras held a snap referendum in which voters resoundingly rejected the creditors’ latest offer. German Chancellor Angela Merkel, angered by the move, led other euro zone governments in pushing back. Facing the likelihood that rejecting the deal would lead the European Central Bank to withdraw the emergency aid keeping Greek banks afloat, Tsipras gave in. Youth unemployment peaked at more than 60 percent and at the end of 2016 the overall jobless rate stood at 23 percent.

Source: Eurostat

The Argument

The bailout agreement and the EU refugee crisis lowered the temperature in the debate over Greece's finances. But to richer northern countries, Germany in particular, Greece remains a spendthrift that won't reform without continued pressure. To many Greeks, their travails have shown the limits – or even folly — of the austerity imposed on it. Tsipras said he capitulated last year because leaving the euro would have been too destructive. Euro membership is intended to be irrevocable, and any departure would be a blow to the long process of European integration. But when the showdown came to a head, Merkel got her way by being willing to let Greece go, arguing that it was more important that the euro zone enforce its rules. 

The Reference Shelf

  • A Bloomberg QuickTake Q&A explains the latest crisis. 
  • The European Commission's guide to financial assistance to Greece.
  • The Bank of Greece summarized its Chronicle of the Great Crisis from 2008 to 2013.
  • The Hellenic Foundation for European and Foreign Policy has a crisis observatory page.

First published Dec. 24, 2014

To contact the writer of this QuickTake:
Marcus Bensasson in Athens at mbensasson@bloomberg.net

To contact the editor responsible for this QuickTake:
Leah Harrison at lharrison@bloomberg.net