Bailout presents Greece tough choices

London

THE new Greek government faces tough choices in the coming year as the depressed nation struggles to meet terms of the 86 billion euro (S$136 billion) bailout package which was agreed upon recently.

The focus has of late diverted from Greece as emerging nations and global markets weathered the slowdown in China, a strong US dollar and an obsession with the US Federal Reserve's interest rate decisions.

Greece, however, remains important as further crises in its economy and those of Italy, Spain, Portugal and France (which has had its debt downgraded) could place renewed pressure on the euro.

A Greek exit from the eurozone is still very possible in the next few years, Capital Economics and other economic consultants predict. During the ruling party Syriza's negotiations with its creditors, capital outflow restrictions had to be enforced as money poured out of the country. Greek banks are under acute pressure and need to be recapitalised with an estimated 25 billion euros.

In terms of the bailout package, the Greek government has to finance the banks with 10 billion euros.

According to leaked documents there will have to be a "bail in" - that is shareholders, holders of bank bonds and possibly depositors will have to foot an agreed portion of the remaining amount. So protests are likely. Worryingly, Golden Dawn, a far-right extremist party, has been gaining support in the current elections.

As The Business Times goes to press, polls indicate that Alexis Tsipras may be forced to resign as Greek premier in the fifth election in six years. The left-wing Syriza party is only a point ahead of former defence minister Vangelis Meimarakis's right-of-centre New Democracy (ND) party.

Mr Tsipras - who lost a third of his MPs, all of whom were highly dissatisfied with his about-turn on austerity under the bailout terms - may not gain enough support to form a single- party government. His acceptance of the bailout deal despite more than 60 per cent of voters rejecting austerity in a July referendum has left his supporters feeling betrayed.

If the polls are correct, Syriza would have to cobble together an unstable coalition with the centrist left To Potami and socialist Pasok parties. Mr Tsipras has ruled out forming a coalition with ND as he claims that it is tainted by "Greece's oligarchic and corruption-ridden politics".

Mr Meimarakis, however, has not ruled out a formal coalition with Syriza. He has stated that his party's goal is to form a national coalition government with as many parties as possible. "This is the most beneficial scenario for Greece to promote the necessary reforms and changes that will enable our country to remain in the eurozone," he said.

That pronouncement follows a renewed warning from German Finance Minister Wolfgang Schaeuble who, prior to the bailout, proposed a "temporary" Greek exit from the euro. He said in a German newspaper interview that "Greek society has to face whether it wants to make economic adjustment processes as a member of a monetary union".

This adjustment is a radical programme of spending cuts, pension reforms, tax hikes and major privatisation of national assets to balance the budget and satisfy creditors. New funds from the bailout package will not be released unless the cash-for-reforms programme is implemented, with reportedly 120 new laws by year-end.

These reforms, bitterly criticised by anti-austerity campaigners, such as former Greek finance minister Yanis Varoufakis, are to be reviewed quarterly by Greece's international creditors. Mr Varoufakis states that the Greece populace are on their knees and so far the underperformance of the economy backs his views.

The Greek economy has recovered slightly from a very low base, according to latest data from Eurostat. After contracting 0.4 per cent in the final quarter of 2014, gross domestic product (GDP) grew 0.1 per cent in the first quarter and 0.9 per cent in the second. A reason for the improvement is that the devaluation of the euro and cheap deals helped the tourist trade.

The slight increase in GDP growth was from a very low base as, from its peak in 2007, GDP has slumped 33 per cent. Unemployment has fallen slightly since 2014 but it is still 25 per cent, while the youth jobless rate is a staggering 52 per cent.

Latest economic figures from the Bank of Greece illustrate the downturn. Retail trade is down 28 per cent from 2010 levels, which were already well down from the 2007 boom levels; the construction index down 64 per cent; architectural and engineering activities down 68 per cent; advertising and market research down 58 per cent; and revenue on mobile and telephones has shrunk 45 per cent.

Read more on the Greek crisis here