Greece exits bailout monitoring, but austerity pain lingers

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ATHENS — Greece is set to graduate from post-bailout monitoring — and government and creditors are touting the exit as the end of a dark era that inflicted deep scars on the economy and society.

On August 20, Athens officially winds down the enhanced surveillance regime that followed its three back-to-back bailouts from 2010 to 2018. The move sends “a message to investors and markets that Greece is out of the woods [and] a step closer to investment grade,” according to George Pagoulatos, head of the Hellenic Foundation for European and Foreign Policy think tank in Athens.

“After 12 years … a difficult chapter for our country comes to a close,” Greece’s Finance Minister Christos Staikouras said in a statement last week, adding that this will allow the country greater freedom in making economic policy. 

The European Commission welcomed Greece’s achievements and its commitment to continue carrying out reforms beyond the end of enhanced surveillance. 

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But the headlines obscure the fact that Greece is still struggling with many of the weaknesses that have weighed on growth for decades, analysts say. And they make the economy particularly vulnerable to the fresh shocks from the Ukraine war, the energy crisis and stagflation risk that are looming over the eurozone.

“Inflation is at the highest level in 29 years [while] wages are still very low,” points out Wolfango Piccoli, a co-president at consultancy Teneo. “There are new economic challenges that completely sideline this moment. The focus for voters is on the real economy, rather than on technical issues.”

Greece’s economy has rebounded since the crisis era. The unemployment rate, which during the crisis reached a staggering 28 percent, is now at 12.5 percent. Its gross domestic product grew by 8.3 percent in 2021 and the Commission expects it to grow by 4 percent in 2022 and 2.4 percent in 2023.

However, inflation stands at 11.5 percent, making the cost of living almost unbearable for many Greeks. Greece also lags behind most advanced economies in offering well-paid jobs, according to the OECD.

Finance Minister Christos Staikouras said that exiting the bailout monitor will allow Greece greater freedom in making economic policy | John Thys/AFP via Getty Images 

Moreover, despite the reforms that Athens had to push through under the bailout deals, it wasn’t able to chip away at some of the biggest structural challenges. Those include a massive bureaucracy, especially in the legal system, and chronic tax evasion. Rather than diversifying its economy, Greece remains hugely dependent on tourism. And the vast majority of businesses — typically small enterprises — are considered insolvent.

Meanwhile, Greece still bears the dubious distinction as the only eurozone member whose sovereign debt has junk rating — even though Prime Minister Kyriakos Mitsotakis claims that the country could achieve investment grade status in the first half of 2023. 

Against this backdrop, Greek sovereign debt remains among the most expensive in the eurozone — reflecting investor sentiment that there’s still a hefty premium needed to hold its government bonds. As of Tuesday, the yield on its 10-year bond was 3.26 percent, compared to 3.07 percent for Italy, which has been beset with political turmoil. That’s well above the ultra-safe German bund at 0.94 percent.

Turning a corner?

Greek debt has been getting pricier since last fall, with the trend exacerbated by the European Central Bank’s steps toward policy tightening this year. Still, the 10-year bond yield remains substantially lower than it was in mid-June, when it spiked to 4.69 percent. The ECB’s subsequent pledge to deploy a new bond-buying “tool” to mitigate borrowing costs in the most heavily indebted eurozone members — notably Italy — has eased some of that pressure.

The tool, dubbed the Transmission Protection Instrument (TPI), “has a stabilizing effect [and] offers a backstop for any economy that could face a crisis, including Greece,” said Pagoulatos.

Moreover, fluctuating bond yields don’t have an overwhelming impact on Greece’s borrowing costs. Its debt — which totals €350 billion — is regulated with a contained interest rate under the terms of the bailout, and about 70 percent of those obligations are owed to public financial institutions, under long-term repayment schedules, rather than to private investors.

On the domestic front, Athens has implemented numerous reforms, including in the welfare system, the labor market and tax governance. Some long-planned measures remain pending, but they are extended to October, including, among others, progress in a number of privatizations, clearance of pensions backlog and putting the tax office system into full operation.

Greece is also among the biggest beneficiaries through the EU’s pandemic recovery fund, and is in line to receive up to €17.8 billion in grants and €12.7 billion in loans. The country’s RRF program sets out that 37.5 percent of the plan will support green investments and 23.3 percent will be directed toward the digital transition.

The crisis years reconsidered

Despite all the progress, many economists now say that the long-term cost of the bailouts — which channeled some €290 billion of loans from the Commission, the ECB and the International Monetary Fund — inflicted pain that’s still being felt today. The austerity measures imposed by creditors, mainly in the form of steep cuts to public services and crushing taxes, amounted to €72 billion.

“The EU learned a lot in the ‘workshop’ of the Greek crisis and this allowed it to react faster and more effectively to future challenges,” said Evangelos Venizelos, who held senior roles in the Greek government between 2011 and 2015, including as deputy prime minister, during the bailout crisis. “Lenders have shown solidarity but also a punitive attitude.”

The Greek GDP fell from $355.9 billion in 2008 to $188.7 billion in 2020 and is now starting to grow again at around $216.4 billion in 2021. The economic depression left Greeks exhausted, angry and disillusioned. Nearly half a million left for Europe’s more affluent north, and few have returned.

Greece has made tremendous progress, argued Alvaro Santos Pereira, the OECD’s director of country studies, but still has a lot to do to catch up with its peers. 

For example, he said, “almost 15 years after the start of the global financial crisis, Greece’s banks are only just getting their bad loans ratio back into single digits, allowing them to start providing the financing that’s essential for new investments.”

And among analysts, the bailouts will remain a contentious topic for years to come.

“It’s too early to say, whether the bailouts were successful,” said Piccoli from Teneo.”The economy is picking up, but meanwhile the usual weaknesses are emerging. The concern is that not much has changed in terms of structure.”

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