May 5, 2015

Despite weeks of tense negotiations, the Greek government has been unable to unlock EUR 7.2 billion in aid from the country’s bailout program. The funds, which are part of Greece’s EUR 240 billion bailout, are conditional on the country enacting a number of economic reforms. The details of those reforms have continually been the stumbling block in the negotiations. On 30 April, Greece presented the latest draft of reforms to the Brussels Group—representatives of the IMF, the European Central Bank and the European Commission. However, negotiations are still ongoing and Eurozone finance ministers will meet on 11 May. While the details of the reform plan have not been released, the Greek government has stated that the two sides remain far apart on the issue of labor reform. The latest round of talks comes amidst a backdrop of increasing tensions between the negotiating groups, leading Tsipras to shake up his negotiating team on 27 April. Tsipras’ decision took Finance Minister Yanis Varoufakis out of the lead negotiation seat for Greece and replaced him with Deputy Foreign Minister Euclid Tsakalotos in an effort to speed-up an agreement.



Looking forward, Greece’s future is shrouded in uncertainty. The country is teetering on the edge of bankruptcy and has a debt repayment of almost EUR 1.0 billion due to the IMF on 12 May, in addition to the country’s monthly pension and salary bill. Even if Greece is able to unlock the remaining bailout funds, the program ends in June and it is not clear how the country will finance debt repayments going forward. Moreover, Tsipras faces a tough road ahead politically. The Prime Minister campaigned on an anti-austerity platform and his coalition government has had to make key concessions to the country’s creditors. The government must walk a tight-rope between balancing anti-austerity campaign promises and satisfying creditors’ demands for reform, and the possibility of another snap elections still looms. Further, there is a large possibility of drawn-out negotiations between Greece and its creditors (“Grimbo”), which, on the extreme side, could result in a “grexit” from the Eurozone. Willem Buiter, Chief Economist at Citigroup adds:



“Grexit in the next few months is not inconceivable, and it is certainly more likely if we consider Grimbo durations of a year or more. It could result from the negative outcome of a referendum on Eurozone membership or from a unilateral decision by the Greek government to exit the Eurozone (even though, given the current level of support for Eurozone membership, such a decision would undoubtedly be very controversial domestically), or it could be part of an agreement with the remainder of the Eurozone to a ‘friendly divorce’ In exchange for the kind of financial support from the creditors after Grexit that was not available before it. More likely than not, Greece would have access to some special IMF and EU funds post-Grexit, as well as continuing support from the ECB in defending the exchange rate of the ND [new drachma].”



Greece’s outlook is deteriorating rapidly. FocusEconomics Consensus Forecast panelists revised their projections for 2015 downward this month. Panelists foresee a 0.5% expansion, which is down 0.4 percentage points from last month’s forecast. For 2016, the panel expects growth to pick up to 2.2%.