Greek Days Have Started

by Carsten Brzeski

With three meetings in less than two weeks, eurozone finance ministers hope to finally strike a deal on giving Greece more time for its adjustment.

The decisive phase for Greece has started. Yesterday, Eurogroup president Juncker announced an unscheduled meeting of eurozone finance ministers on 8 November. With the scheduled conference call of ministers on 31 October and the already planned Eurogroup meeting on 12 November, ministers will have three meetings to decide on further steps for Greece. Even if the Troika report has not (yet) been officially released, it seems clear that the eurozone is willing to give Greece somewhat more time for the adjustment.

More time, however, would eventually also cost more money. According to earlier market reports, a two year delay of the austerity measures could lead to a financing gap of between €15bn and €30bn. This financing gap would have to be closed to keep the IMF on board of the Greek rescue and to be able to pay out the next tranche of the loan – of course, always assuming that Greece fulfils its obligations of the structural reforms and austerity measures.

Generally speaking, more time for Greece could be ‘bought’ by two main options: a third bailout package or debt forgiveness. This is what according to media reports is also proposed by the Troika. However, neither of these two options is politically attractive for most eurozone countries as both options would cost tax payers’ money. Therefore, it did not come as a surprise that the German government directly and indirectly tried to rule out both options, with opposition against debt forgiveness being much louder than against a third package. Particularly, German chancellor Merkel seems to be – very gradually – giving up opposition against a third aid package. While a third Greek bailout would probably not be supported by all of her own coalition’s lawmakers, Merkel could get parliamentary support from the biggest opposition party, the social democrats. Less than one year ahead of the federal elections, eurozone matters could increasingly be dominated by German domestic politics.

Debt forgiveness (aka Official Sector Involvement) would, according to the German government, be against the principle of no-bailout (for the government) and against the principle of no-monetary financing (for the ECB). While the monetary financing argument remains a strong one for the ECB, the no-bailout argument looks much weaker, particularly in light of all rescue actions of recent years. As a consequence, some kind of OSI should not entirely be ruled out. However, it would not come for free for Greece. In our view, OSI or debt forgiveness would come with even more strings attached than the current programmes, leading to more and far-reaching loss of sovereignty. The core eurozone countries would do everything to avoid the impression that OSI is relief for free. Otherwise, other eurozone peripheral countries could be tempted to ask for the same.
Given the broader consequences of OSI or debt forgiveness and the limited political appetite in several eurozone parliaments for a third bailout package, filling the funding gap for Greece will again require some creativity. A possible way out, at least in the short term, could be a combination of several options, such as lowering the interest rates on the first two Greek packages and front-loading parts of the funding of the second package. This could again kick the Greek can further down the road.

Dr. Carsten Brzeski ( is Senior Economist at ING BELGIUM SA/NV – Economic Research (©Carsten Brzeski)