Greece has met the demands of its creditors—so where’s the debt relief?

Greece is once again making headlines. Yet again, there is a spat about what to do with its debt. At a Eurogroup meeting last week, the International Monetary Fund and a group of Eurozone countries, led by Germany, were at loggerheads. It finished late in the evening without progress, or the disbursement of much needed funds.

Greece is unfortunate to be caught in the middle of this. Arguably, the country had done its bit in very difficult economic circumstances. A conclusion to the second review of the third bailout since the financial crisis (it is hard even for devoted followers of the Greek euro drama to keep track of this never-ending play!) was expected at the meeting. This would have freed up money for Greece.

The completion of this review had been delayed for many months, and the uncertainty created had pushed Greece back into recession. Against a European renaissance, with industrial production in the eurozone rising at its fastest rate for six years, Greek GDP fell by 1.2 per cent in the last quarter of 2016 and by a further 0.1 per cent in the first quarter of 2017, bringing the country’s cumulative GDP decline to some 27 per cent over the past eight years.

What is more, to ensure that the extra tranche due to Greece could arrive in time for the country to meet €7.3bn of debt repayments due in July, the Greek Parliament recently voted for some very tough austerity measures—to strong domestic opposition. The tax rises and pension reforms have resulted in renewed protests, strikes and further disruption to the economy.

So what is going on? Why are the creditors holding out? One would have expected some leniency. The pressure on Greece’s hard-left government, forced to impose IMF-inspired austerity, has been great—but it has still managed to grind out primary surpluses in its budget (this is the difference between revenues and spending, excluding debt servicing). The Greeks have therefore exceeded expectations. Greece has done its bit.

The problem is this. Germany is saying that it will not despatch more money unless the IMF remains involved in the current bailout—which it has refused to do. The IMF says it will only support a plan which goes further than a simple supply of new funds, and incorporates relief of Greece’s existing debt. Germany’s finance minister, Wolfgang Schäuble, so far refuses to contemplate writing off Greek debt. He is backed by a recently released report by the European Stability Mechanism, which argues that under some scenarios Greek debt is in in fact sustainable.

For Germany, IMF participation is a must: it needs the legitimacy in order to convince its sceptical electorate, heading to the polls in September, that lending to Greece is money well spent. The IMF is adamant that Greece's debt is unsustainable and the growth and primary surplus projections of the European Commission are over-optimistic.

The surprising thing in all this is that in the current economic climate, logic dictates that the eurozone should be accommodating towards Greece. The capital markets had already been anticipating progress on the matter, and bond yields had come down sharply due to the expectation that a shrinking of Greek debt would raise the attractiveness of holding Greek government bonds. It was also viewed as potentially paving the way for them to be considered safe enough finally to be included in European Quantitative Easing programme, which buys relatively high rated bonds in the secondary market, and thereby injects much needed liquidity through monthly purchases into the European financial system.

Furthermore, French President Emmanuel Macron’s win is viewed as heralding a push for greater integration of the EU27 in the face of Brexit, closer ties between Germany and France and more emphasis on growth—from which Greece should eventually benefit. Sadly it hasn't resolved the Greek debt conundrum.

There are now rumours that the IMF will be offered an olive branch that would mean it could be half-in, half-out of a deal. Let's hope this comes off, because Greece desperately needs a return to normality. And Prime Minister Alexis Tsipras needs to show a debt relief deal is on the cards before the end of the current bail-out programme, in 2018, for his own political survival.

If one materialises, it will finally give the Syriza government an achievement to present to the Greek electorate. Since it came to power, the population has been squeezed disproportionately, seemingly to no good economic effect. All eyes are on the next Eurogroup meeting, scheduled for 15^th June.