Central bankers usually tend to speak cautiously and moderately. They know any comment could send shockwaves through the markets. But these are not normal times in Greece.
On Monday, speaking before the Greek parliament, Yannis Stournaras, head of the Bank of Greece, made a drastic comparison: anyone demanding the reintroduction of the drachma “should travel to North Korea. They’ll see what would happen here.”
The specter of Grexit has reappeared, and not just in Athens. In many European capitals, discussion centers on whether this year will see a Greek departure from monetary union, so narrowly avoided in 2015.
Although Grexit remains unlikely, the crisis has returned to haunt the euro zone. Investors are getting nervous, with risk premiums on Greek bonds climbing again: on Tuesday, yields on one-year Greek government bonds climbed to 11.85 percent.
This is the last thing Europe needs, with crucial upcoming elections in the Netherlands and France. A renewed Greek crisis could also pose serious problems for German Chancellor Angela Merkel, who also faces an election campaign this year. Her opponents will be only too happy to remind voters that Greece’s chronic problems have plagued Germany for seven years now, with no end in sight.
People demanding a reintroduction of the drachma should travel to North Korea. They’ll see what would happen here. Yannis Stournaras, governor, Bank of Greece
Greece faces another moment of truth in July, when finance minister Euclid Tsakalotos must find €7.4 billion, around $7.83 billion, to pay interest payments and maturing bonds. Athens will be unable to pay creditors without further outside injections of capital. So debate is intensifying over the release of the next tranches of money from the third bailout package. This is, as always, a debate about Greece’s public spending cuts and structural reforms.
On Wednesday Pierre Moscovici, the European commissioner for economic and financial affairs, will travel to Athens for talks. But no one is expecting a substantial breakthrough. Even the Troika—supervisory officials from the European Union, the European Central Bank, and the International Monetary Fund— have not yet returned for talks. There is simply no basis for substantive negotiations at present.
Some foundation for talks was to have been established last Friday in Brussels when Mr. Tsakalotos met with Greece’s creditors. Athens is refusing to implement further cost-cutting measures, as a Greek government spokesperson again confirmed Tuesday. In addition, there is disagreement between the various creditors: above all, major disagreements persist between the European Commission and the IMF, including on the underlying economic data.
E.U. officials take a largely positive view of developments in Greece. According to their figures, the Greek economy unexpectedly grew 0.3 percent last year, and should achieve an impressive 2.7 percent growth rate in 2017. Speaking to Handelsblatt, the European Commission vice president, Valdis Dombrovskis, said Athens had done “almost everything” in order to pass the upcoming bailout review. But he acknowledged that the IMF had “a very pessimistic macroeconomic and fiscal projections.” He added: “There is a gap between our figures and theirs, one I hope we can quickly bridge.”
The IMF continues to insist on its own view of the Greek economy. Data for 2016 was still not available, Poul Thomsen, director of the IMF’s European department, told Handelsblatt. “When we have it, we will look at it. If the data suggests we were too pessimistic, we will change our prognosis,” he said.
E.U. insiders think there is little chance of an agreement at the meeting of European finance ministers next Monday.
The IMF, headquartered in Washington D.C., denies that its position on Greece is too rigid: “Accusations that we have outdated models and that we are permanently too pessimistic, goes against the fact that the Greek program has missed targets for years now,” said Mr. Thomsen. “If anything we were too optimistic about growth and budget surpluses, since reforms have not been implemented as expected,” he added.
The dispute between economists in Brussels and Washington is long-standing. Since the beginning of the Greek bailouts, European officials have tended to paint a rosier picture of the Greek situation, partly in order to defuse the ongoing crisis. Critics says this has led to problems being kicked down the road.
Despite misgivings, the IMF has so far gone along with European actions. It may be different this time. The IMF president Christine Lagarde agreed to the third bailout in the summer of 2015. Nonetheless, the fund is still not officially participating in the third bailout, and is undecided whether to contribute to new funds needed this summer. This presents a serious problem for the German government, which promised voters the IMF would participate. In addition, the Greek government is substantially behind schedule with agreed reforms. Mr. Tsakalotos acknowledges that only one-third of measures agreed for the second review have so far been implemented.
Greece’s creditors are now demanding further reform measures. These are not necessary to achieve next year’s budget surplus target of 3.5 percent of GDP, but the IMF and the German government want them passed now, to come into effect in 2019 and 2020. They include another round of pension reforms, regarded by Greek prime minister, Alexis Tsipras, as presenting particular political difficulties.
Mr. Tsipras’s coalition of left-wing and right-wing populists has a wafer-thin majority, with 153 seats in the 300-seat Greek parliament. The prospect of further cuts is causing growing unrest among Syriza, Mr. Tsipras’s grouping of left-wing parties. Syriza, and Mr. Tsipras, are facing disastrous opinion poll scores: around 16.5 percent, less than half of the party’s 35.5 percent vote in the September 2015 election. The conservative Nea Dimokratia party currently leads with 33 percent. The ND leader Kyriakos Mitsotakis, who is calling for new elections, met on Tuesday with German finance minister, Wolfgang Schäuble, in Berlin.
Multiple discussions are ongoing, but there is no solution in immediate sight. Athens is making optimistic noises, but E.U. insiders think there is little chance of an agreement at the meeting of European finance ministers next Monday. Detailed negotiations have yet to begin between Athens and officials from the Troika.
Any delays mean the Greek crisis will linger on, and with a potential impact on the Dutch elections in March, and the French presidential elections in April and May. This may in turn make a solution more difficult. Speaking in Athens, Mr. Stournaras, the governor of the Greek central bank, hinted at this. He urged all parties to find a quick solution: “Later might be too late,” he insisted.
Ruth Berschens heads Handelsblatt's Brussels office, leading coverage of European policy. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin. Gerd Höhler is a Handelsblatt correspondent based in Athens. To contact the authors: [email protected], [email protected], [email protected]