Q&A: What next for Greece and the eurozone
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Q. Does the emphatic victory of the radical leftwing Syriza party in Sunday’s Greek elections mean that a clash over debt relief is inevitable between Athens and its EU and International Monetary Fund creditors?
A. The gulf between Syriza and the creditors is wide and will not be easy to bridge. In the short term, it will be in the interests of both sides to take the simple but very useful step of extending Greece’s financial bailout beyond February 28, when it is due to expire.
Q. What will be the effect of extending the bailout deadline?
A. For one thing, it will enable the European Central Bank to continue providing liquidity to Greek banks on favourable terms. This will be crucial at a time of high political uncertainty, which risks perpetuating the steady flow of deposit withdrawals from the banking system that built up in the pre-election period.
Q. But will an extension bring a deal on debt relief any closer?
A. Extending the bailout deadline would, in an ideal world, give Alexis Tsipras, Syriza’s leader, and the creditors time to take a deep breath. Then they could consider how to forge a longer-term compromise without jeopardising Greece’s eurozone membership, a step with unpredictable consequences for the 19-nation area as a whole.
Q. So Greece will not drop out of the eurozone?
A. No eurozone government wants that. The majority of Greeks do not want that, either, so it would be politically dangerous for Mr Tsipras to take any steps that risked eurozone exit. But to avoid an accident, he will have to keep his party’s far-left militants under control.
Q. How much room does Syriza have to play hardball with the EU and IMF?
A. Not a lot. Some €4.3bn of debt repayments fall due in March. More than €6bn fall due in July and August. Short-term government debt can probably be issued to cover Greece’s funding needs in the immediate future. But if Syriza is not to preside over a default, it will need assistance from its lenders — at the least, the release of €7bn in bailout money that Greece hoped to receive last year, a new precautionary credit line and continued help for Greek banks from the ECB.
Q. What chance does Syriza have of securing a formal write-off of some of Greece’s foreign debt, totalling 175 per cent of annual economic output?
A. The prospects look bleak at the moment, especially because the German government vehemently opposes such a deal. Chancellor Angela Merkel knows German public opinion backs this stance, and is also wary of the anti-euro, rightwing Alternative für Deutschland party that is breathing down her neck.
Q. But surely Greece has no realistic chance of ever completely repaying its debt?
A. This is what Mr Tsipras, and plenty of non-Greek (and non-German) economists, say. But the politics of the eurozone keep getting in the way. So a more likely compromise is that the creditors extend the maturities of Greece’s debt payments and offer lower interest rates or even an interest rate moratorium. The problem is that Greece has already benefited from such concessions in the past. More such gestures would not radically transform Greece’s economic outlook for the better.
Q. What else will Mr Tsipras propose, and will he get it?
A. He has suggested an arrangement under which Greece would repay its debts according to a formula based on future Greek economic growth rates. He has also proposed a European debt conference that would abolish or restructure large amounts of Greek debt, just as was done for Germany in 1953.
Q. What will the creditors say to that?
A. They may be open to lowering the primary budget surplus demanded of Greece every year for the rest of this decade. Some governments, such as Ireland, seem interested in a general debt conference. But the bottom line is that none of Mr Tsipras’s proposals for debt relief will get a sympathetic hearing unless he promises to continue deep-seated reforms of Greece’s economy and the public administration.
Q. On what issues is Syriza unlikely to budge?
A. Syriza has a strong democratic mandate to govern Greece, but the state coffers in Athens are almost empty. The incoming government will aim to keep its election promises where they are affordable. Providing immediate assistance for the poor and destitute, for example in the form of restored electricity services and food stamps, is one way of remaining true to its vision of social justice.