Greece has already needed two IMF/EU bailouts worth a total of €240 billion to shore up its economy and help it to meet its obligations. Creditors had to accept a substantial “haircut” on their investments as a condition of Greece’s being granted the second of the bailouts. The financial support has come with strings attached and Greece has had to embark on economic, social and labour reforms in addition to draconian austerity measures in order to get the help it needs. If help had not been forthcoming, Greece would have gone into a full sovereign default and, almost certainly have been obliged to leave the Euro – which would just have been the start of its troubles.
The austerity measures and changes that the Greek people have been forced to accept have been deeply unpopular, almost leading to the election of a left-wing government that promised to abandon them. Greece wants its partners to agree to a two-year extension to the timeframe agreed with the bailouts – this would mean that the austerity measures could be softened. Greece said that it would need an additional €15 billion in support were it to be granted the extension.
What if?
If granted the extension, Greece would not necessarily require further EU help and could raise the money through an issue of short-term bonds on the markets. It remains to be seen how keen investors would be for such a vehicle. Greece would benefit from the recent ECB initiative to ensure that yields on sovereign bonds remained reasonable by intervening in the markets to buy bonds and thereby suppress yields.
The “Troika” will report on Greek progress under the terms of the existing agreements next month. A satisfactory report is needed to ensure that the next tranche of funding will be released to the Greek government. Given that the markets have been calmed in recent weeks by the ECB move and a green light for German support for the European Stability Mechanism and closer fiscal union, it is unlikely that the EU will score an own goal by pulling the plug on Greece at this late stage, if it can be shown that Greeks are striving to meet their obligations.