For Better Or Worse: Greece’s Bailout Exit Deja Vu

Greece's bailout program ends on Aug. 21

Yiannis Mouzakis via Macropolis | As Greece stands on the cusp of exiting the third, and final, of its painful bailouts, there is a discussion about the terms under which it is exiting and how they compare to the conditions that were on offer the last time the country was close to the MoU finishing line, about four years ago. Examining the two cases is actually a useful exercise – not just for Greek crisis veterans.

The summer of 2014 had just ended when Greece completed the second programme’s fourth review, leading to the eurozone and the International Monetary Fund disbursing almost 10 billion euros in total. The European side of the programme was due to be completed at the end of that year (the IMF programme was meant to run until March 2016) but the then New Democracy and PASOK coalition governing the country started eyeing an early end to foreign oversight.

“Not only do we not need a new memorandum […] we don’t need the rest of the money that we were due to get as part of the current memorandum from the start of next year. We can leave it 1.5 years earlier […] that is our goal,” Prime Minister Antonis Samaras argued in Parliament during a confidence vote at around this time.

His finance minister, Gikas Hardouvelis, argued that Greece could get similar borrowing rates from the market to those of the IMF and, as such, could leave the Fund’s programme earlier.

Greece had two successful attempts at tapping the markets during spring and early summer of 2014, although the participation in the second issue was underwhelming and Greece accepted less than it had initially targeted.

The ensuing months shuttered the early exit narrative, and by early December, Samaras had failed to close the infamous fifth review, debt relief tied to the programme conclusion did not even feature in the discussions with the creditors and the programme had to be extended by two months as a potentially inconclusive Presidential vote was looming.

Nearly 40 days later, Samaras was no longer the Greek prime minister having lost the early elections he called for January 25. Since 2010, when Greece signed its first programme, that was the closest that the country had come to ending its bailout era.

What followed was a tumultuous first half of 2015 and a third programme that the current prime minister, Alexis Tsipras, will see out on August 20.

That finishing line had been his main political target since he realised that completing the third programme represented his best option. He can now, as he had once promised, argue that he took Greece out of the bailouts, which he claims are the product of New Democracy and PASOK’s corruption and ineptitude.

His opponents, though, do not accept this interpretation and have sought to get back at the SYRIZA leader by trying to convince voters that the “clean exit” Tsipras claims lies ahead is a mirage.

They point out that Greece has committed to very high primary surpluses, will be kept under close surveillance in the next couple of years, has pre-legislated pension cuts and a lower tax-free threshold for 2019 and 2020 and that all these constitute a fourth programme, hence there is no end to the MoU.

This approach recently led to a public row with European Economic Affairs Commissioner Pierre Moscovici, who announced the end of the third programme and a return to normality for Greece during a visit to Athens.

Even in political tactical terms, it seems odd that New Democracy and PASOK refuse to accept the end of the most tumultuous and costly period in modern times, especially with both looking at potential gains in the next general elections.

If this deal is so bad, how does it compare to the one that they were working towards and were willing to accept near the end of 2014? Was there really any other type of deal on the table, then or now?

Fiscal targets

Every single organisation around the world that assessed the debt deal Greece was granted on June 21, including the IMF and the European Commission, has argued that the goal of primary surpluses of 3.5 percent until 2023 is detrimental to growth and that the goal of 2.2 percent on average up to 2060 set by Greece’s lenders has not been achieved by anyone before and needs to be reconsidered.

At this stage, endorsing the overwhelming evidence produced by the IMF last summer that the target should be lowered to 1.5 percent would have opened a debt sustainability discussion and the need for more upfront debt relief that the eurozone was not willing to accommodate. As on numerous occasions during the crisis, politics dictated decisions of an economic nature.

No government, of any colour, would be able to negotiate the primary surplus down at this juncture.

In fact, back in 2014 Greece’s lenders were even more unrealistic and the assumptions and targets that underlined the end of the second programme were for a primary surplus of 3 percent in 2015, going up to 4.5 percent of GDP in 2016 and staying at 4.5 percent until 2022.

Only a few years ago, based on available GDP data and estimates, Greece was expected to save an additional 1.7 to 2 billion euros annually over the period in question.

By the time 2014 closed, the state budget situation did not meet expectations, with revenues falling short by 1.8 billion euros led by personal and corporate tax revenues. Greece had a serious fiscal effort ahead to meet the target of 4.5 percent of GDP by 2016.

Furthermore, if the current long-term goal of 2.2 percent is unprecedented, the long-term target in the IMF’s DSA at the end of 2014 was for a primary surplus that averages 4 percent of GDP for about four decades.

“Although most of the fiscal adjustment has already taken place, more remains to be done to achieve the targets underpinning the DSA,” said the Fund. “Rebounding growth should make this task somewhat easier going forward. But maintaining the programme primary surplus of about 4 percent of GDP for several years may yet prove difficult.”

Although growth estimates between now and 2014 for the near term have been revised downward due to the setbacks suffered as a result of the first half of 2015 and the subsequent capital controls, the IMF held a consistent view that Greece’s long-term challenges persist and are deep-rooted. There is no room for anyone to be willing to consider in 2014 a primary surplus of 4 percent of GDP a viable solution to complete the programme and then four years later label a target around half of its volume as “a rope around Greece’s neck.”

Pension cuts and tax-free threshold

In spring 2017, Tsipras was in a tight spot: the programme review was dragging on for months as the IMF and the European lenders could not agree on their fiscal estimates for Greece to reach the 3.5 percent primary target in 2018, with a knock-on effect on debt sustainability.

The IMF insisted that based on current policies Greece would need 2 percent of GDP in measures to sustain the 3.5 percent primary surplus up to 2023. But Greek authorities and the Commission were convinced the target was within reach without any new interventions.

The IMF leaving was not an option for some eurozone countries so a solution had to be found before the May 2017 Eurogroup.

A compromise was reached: Greece would legislate two reforms that the IMF had been advocating for years. These were the lowering the cost of pensions spending by 1 percent of GDP and collecting more revenues, also worth 1 percent of GDP, by expanding the tax base through lowering the tax-free threshold. Greece was also granted the right to offset both of those measures with growth-enhancing interventions like extra benefits, some lower tax rates and investment spending if targets were beaten.

All crisis governments had first-hand experience of how effective the IMF could be in extracting concessions from Athens.

In 2014, for example, Greece was expected to reach a primary surplus of 1.5 percent of GDP and double it to 3 percent in 2015. In their review documents in the summer of 2014, the IMF and European Commission estimated a fiscal gap of 1.1 percent of GDP, or 2 billion euros. This meant that if Samaras wanted to close the review, complete the programme and open the debt relief discussion he needed to take additional measures to zero the gap for 2015.

To compound his problem, the Fund estimated that even if the gap in 2015 was closed with permanent measures, meeting the 4.5 percent target the following year would require new measures worth 0.75 percent of GDP. These extra interventions of nearly 3.5 billion euros were a step too far for the New Democracy leader.

Although the IMF praised Greece’s fiscal adjustment in its review document, the Fund was clear on the policies that Greece would have to pursue to correct existing imbalances and carry on having access to the Fund’s lending up to March 2016.

In other places in the document, the IMF argued that at around 17 percent of GDP, pension spending was among the highest in the EU and the link between contributions and benefits was weak.

“Achieving the necessary additional fiscal adjustment without further cuts in wages and social transfers, not least pensions, which remain high relative to GDP, will only be possible with a dramatic improvement in the efficiency of the public sector,” the Washington-based organisation noted.

In the same document, the Greek authorities commit to a process that “in consultation with the EC/ECB/IMF consider a reduction in the high statutory tax rates while aiming to broaden the tax bases.”

In 2015 and 2016, Greece had gross financing needs of 32 billion euros and during that period the IMF was the only official creditor available to finance those needs through the circa 17 billion that were left unused in its own programme.

Samaras did not close that review because he could not deliver what the IMF demanded. It is naive to presume that if he had conceded, he would have dodged the longstanding demands from the IMF for reducing the cost of the pension system and spreading the tax burden to make it more balanced.


Last Thursday, the European Commission outlined how the creditors will continue to monitor Greece once the programme ends in August.

The standard procedure for countries that have completed ESM bailouts is post-programme surveillance, which primarily consists of semi-annual reviews with reporting prepared by the Commission and presented to the Eurogroup.

This process is also incorporated in the ESM’s Early Warning System, which aims to ensure countries that have outstanding loans to the Luxembourg-based fund are in a position to repay those loans by following prudent policies.

After close to a quarter of a trillion euros in loans to Greece (246 billion euros or 126 percent of GDP) and due to the mistrust in the Greek political system that has built up over the last decade, it comes as no surprise that the creditors will deploy an enhanced surveillance system.

Until 2022, a period during which Greece will need to maintain the 3.5 percent of GDP primary surplus and will be receiving the profits from the ECB and other central banks subject to delivering on a range of reforms in six key areas, Greek authorities will be monitored by the Commission, the ECB and the ESM, with the IMF joining in where appropriate.

It is characteristic of the reservations that the European creditors have about granting Greece complete policy freedom that the conditionality on the debt relief is not perceived as a strong enough incentive for sound policies and is being reinforced by regular, albeit less intrusive than in the past, monitoring over the next four years.

The situation in late 2014, when the European programme was approaching its end was not significantly different.

Samaras was in a survival battle by attempting to disengage from the IMF about a year earlier and at the same time as the European lenders. But the price of 10-year Greek bond dropped sharply, leading the yield close to 9 percent from 5.6 percent when he started working on this exit strategy in September.

With gross financing needs over the 2015–2016 period of more than 32 billion euros and markets nervous, it seemed that Greece would need not only the money left over in the IMF programme but also access to the 11 billion euros of the second programme that was earmarked for a bank recap and had not been used (Greece ended up returning that money to the ESM in February 2015 under Tsipras’s premiership).

Going into the November 2014 Eurogroup, eurozone finance ministers were exploring three main options, assuming that Greece would close the fifth and final review and complete the programme.

One option was an Enhanced Conditions Credit Line (ECCL). The other was to use the remaining funds to form a cash buffer and the final choice was to extend the programme by one year.

The problem for the Greek government at the time was that all three options had varied degrees of supervision, ranging from a proper Memorandum of Understanding for the ECCL, enhanced supervision for the cash buffer as money would be released upon delivery of further reforms, while the extension by one year would keep Greece in a bailout state which would defeat Samaras’s bid to break free ahead of time.

The complicated relations with Greece’s lenders, the mistrust they had for Greek politicians and the options that would lead to some form of enhanced surveillance and conditionality were all there in 2014. So, the criticism from New Democracy and PASOK (in opposition now, but in office back then) about the current bailout exit conditions suggest they have very short memories.

The June 21 Eurogroup delivered a far from perfect agreement but it was probably at the outer edges of what could have been achieved given the political limitations on the creditors’ side and the limits that Wolfgang Schaeuble had painstakingly put in place over a period of about two years. It is wishful thinking to believe that the presence of Kyriakos Mitsotakis or anyone else on Greece’s side of the table would have made any significant difference.

Greece’s lenders have dealt with a centre-left government, centre-right/centre-left and radical left/nationalist right coalitions. The reservations that the lenders had about all of them is best summed up in the last review that the Samaras administration managed to close in the summer of 2014.

“The adjustment fatigue now evident and the “social dividends” and “no new measures” promised by political leaders suggest that the political commitment to the debt strategy will be severely tested going forward,” the institutions noted.

No matter what the current government and the opposition parties argue about Greece’s bailout exit, little has changed between then and now. And that, perhaps, is the biggest problem of all.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.