Greece seems to have given in to its creditors’ demands for more austerity as the Greek government sent out a revised reform proposal yesterday which included substantial concessions on its part. Is this the end of the Greek drama? Most likely not.
Greeks now demand more bailout funds than was discussed previously, probably in order to walk away from the table with at least some “positive” outcome. Positive for the popularity of the government party, that is. This might not be a problem for the creditors. The real bone of contention is the possible debt write-off, reduction, restructuring, relief. Whatever you call it. This is what will ultimately be needed for the Greek economy to start going again as there is widespread consensus that the country will not be able to pay off its debts, no matter how hard the austerity measures.
The real problem is that the most powerful creditors, the Germans, oppose any debt haircut. The German voters are very much in favor of more fiscal discipline, making it hard for the German government to openly consider any debt restructuring, which ultimately seems like the only way to go. The next German elections will be held in 2017, which might be an indication that any debt forgiveness could be postponed until the elections are over.
The question is whether Greece could tolerate yet another two years without restructuring. The sooner the restructuring takes place, the better for the Greek economy, given that important labor market reforms are actually carried out. Right now it seems the question of what will prevail, the German government’s wish to delay debt cuts or the possible pressure from other European countries to make necessary concessions.
The most likely outcome seems some form of debt relief, redressed in other terms. Think “interest reduction,” “horizon extension” and