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BRIEFING PAPER
Number 7114, 18 August 2015

Greek debt crisis:
background and
developments in 2015

By Daniel Harari

Inside:
1
...
Failure to complete the
bailout programme in June
2015
3
...
Greek banking system and
capital controls
5
...
Important issues
7
...
parliament
...
parliament
...
uk | @commonslibrary

Number 7114, 18 August 2015

Contents
Summary

3

1
...
1
1
...
3

Background
2010 and 2012 bailouts
Economic depression
January 2015 Greek elections and Syriza’s platform

4
4
4
5

2
...
1
2
...
3
2
...

3
...
2
3
...
4

July 5 referendum and associated events
Referendum and end of negotiations
Bank holiday and capital controls introduced
Government funding issues and default on IMF loan
Referendum result and aftermath

12
12
13
13
14

4
...
1
4
...
3

Greek banking system and capital controls
Greek banks reliant on funding from the ECB
Bank holiday and capital controls implemented on 29 June 2015
Banks reopened but capital controls remain

15
15
15
17

5
...
1
5
...
5
5
...

6
...
2
6
...
4
6
...
6

Important issues
Political instability in Greece
IMF involvement in third bailout package
Debt sustainability and debt relief
Economy
Banking sector recapitalisation
Upcoming debt repayments

26
26
27
28
29
30
30

7
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1
7
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3
5
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Licensed under CC BY 2
...


2

3

Greek debt crisis: background and developments in 2015

Summary
After months of fruitless negotiations, Greece’s future in the Eurozone was saved after a
last-minute three-year loans-for-reforms agreement was reached in July
...
These all-night talks were at times fractious and reportedly came
close to ending without agreement (and likely Greek departure from the Eurozone) before
a deal was finally reached the following morning
...
It requires Greece to implement reforms
including changes to pensions and market-based reforms of the economy designed to
make it more competitive
...

Failure of previous talks led to capital controls and Greece defaulting on the IMF
Prior to this new three-year deal, negotiations on the final instalment of funds as part of
the second bailout programme ended in failure in late June
...
2 billion was
available to Greece from this
...
The electorate rejected the terms, backing the government’s
position (a week later the new three-year agreement was reached)
...
As a result, the second Eurozone bailout programme,
and the funds earmarked from this, expired on 30 June
...
5 billion debt repayment to the IMF at
the end of June (since paid)
...
Foreign
transactions were also severely limited and banks were shut (for three weeks)
...

Consequences of Greece leaving the Eurozone
The newly-agreed €86 billion Eurozone bailout programme reduces the short-term
likelihood of Greece leaving the Eurozone
...
Most economists expect the impact from this on the
UK would come via financial markets and through the impact on the Eurozone economy
...
Two international bailout
programmes in 2010 and 2012 have provided a total of around €216 billion (£154 billion)
in financial aid to Greece
...

Against this backdrop of continued severe economic and social pain, the radical left-wing
Syriza party, who promised to reject the austerity measures, won the January 2015
election beating the incumbent centre-right New Democracy party
...
Background
1
...
In the face of rising government borrowing costs, the country
first requested international assistance in April 2010
...
A
worsening recession and rising public opposition to further austerity
meant the Greek government struggled to meet the conditions of the
agreement
...

A second package of financial assistance was agreed with the Eurozone
and IMF in February/March 2012 and was a more complicated
arrangement than the first
...
2 The
second bailout brought the total combined financial assistance to
around €240 billion (£171 billion)
...
2 Economic depression
The economy entered recession in 2008 and saw persistent contractions
in economic activity until 2014, when growth finally returned
...
4 During
the Great Depression, the US economy shrank by a similar magnitude:
26% between 1929 and 1933
...
)
Greece - GDP (Q1 2007=100)
Quarterly data (Eurostat)
110
100

UK
Eurozone

90
80

Greece

70
2007 2008 2009 2010 2011 2012 2013 2014 2015

This briefing uses the exchange rate of €1
...

For more on this “private sector involvement” see Reserve Bank of Australia Statement
on Monetary Policy, “The Greek Private Sector Debt Swap”, May 2012
3
For more see the Library Note The eurozone crisis – rescuing Greece, May 2012
4
Hellenic Statistics Authority (Elstat), table 6 – quarterly GDP [accessed 30 Jul 2015]
5
US Bureau of Economic Analysis, National Income and Product Accounts Tables, table
1
...
3 real GDP [accessed 5 Aug 2015]
1
2

4

5

Greek debt crisis: background and developments in 2015

The fall in output has led to a steep fall in living standards and social
conditions
...
The youth unemployment rate rose to nearly 60% in
2013 and was still at 53% in mid-2015
...
Wages have declined, poverty has
increased and deprivation has risen
...
8
In 2014 the economy did show signs of stabilising
...
The Greek government was even able to sell some
bonds, for up to five years, to investors for the first time in four years
...
3 January 2015 Greek elections and Syriza’s
platform
Despite the tentative signs of economic recovery, the years of economic
depression, high unemployment and austerity led to the radical leftwing Syriza party winning the 22 January 2015 general election, beating
the incumbent centre-right New Democracy party
...
Syriza’s leader, Alexis Tsipras, became Prime Minster
...
Figures on
satisfaction based on the question “On the whole are you very satisfied, fairly
satisfied, not very satisfied or not at all satisfied with the life you lead?” – 41% of
people in Greece were very satisfied or fairly satisfied, compared with 79% across
the whole European Union
...

9
For more on the election see Library note Greece's new anti-austerity coalition, 28 Jan
2015
6
7

Number 7114, 18 August 2015

Syriza campaigned against the conditions attached to the bailout
agreements and pledged to reverse many of the austerity measures
introduced in recent years, such as the 22% reduction in the minimum
wage
...
It
argues that this led the economy into a vicious negative spiral of weaker
demand causing weaker public finances, in turn resulting in the
imposition of even tougher austerity conditions
...

Syriza said its vow to renegotiate the terms of the bailout agreement
would also include a request for debt relief
...
12 Syriza has said it is committed to keeping Greece
in the Eurozone
...
Japan has the highest debt ratio at 246% of
GDP
...
Failure to complete the bailout
programme in June 2015
€7
...

The failure of the Greek government and its creditors to agree on what
reform measures would be introduced in Greece in return for the
additional funding led to the programme expiring without Greece
receiving these funds
...
1 Overview of bailout programmes
The first bailout in 2010 was cut short by the need for a larger second
bailout in 2012
...
0
billion (€52
...
1 billion
from the IMF)
...
By the time Syriza came to power in
January 2015, a total of €142
...
9 billion from other Eurozone countries 13 and €11
...
14
A sizeable portion of the bailout funds went towards servicing Greek
debt
...
” 15 A further €35 billion was used to “sweeten” the
debt writedowns of private sector debt at the time of the second bailout
in 2012
...


2
...
Prior to this decision, European
Commission, European Central Bank (ECB) and IMF staff conducted
joint review missions to Greece in order to monitor compliance with the
terms and conditions of the programme
...
9 billion from the bailout fund was allocated for bank recapitalisations
...

14
The European Central Bank (ECB) also purchased Greek government bonds under its
Securities Markets Programme
...
9 billion in these bonds by end 2012
...

The loan programme between Greece and the Eurozone bailout fund,
the European Financial Stability Facility (EFSF), was due to expire on
28 February 2015
...
8 billion from
this fund was only to be provided after the latest review was concluded
successfully
...
9 billion held by the ECB, 19 and a
further €3
...
2 billion (£5
...


2
...
The main forum for negotiations is the Eurogroup – a meeting
of the finance ministers of the 19 Eurozone countries
...
21 The provisional terms of this agreement were:
•

The current bailout programme would continue, with its
deadline extended from 28 February to 30 June, in order for the
“institutions” of the European Commission, IMF and ECB to
complete their review and subsequently disburse the €7
...


•

No reduction in debts - Greece was to honour all of its financial
obligations to those they have borrowed from
...
A lower surplus, in theory,
allows for higher government spending levels or lower levels of
taxation
...
Any reforms must be
approved by the institutions (EC/IMF/ECB) who determine whether
they are sufficient for them to complete their review and allow
the €7
...
This
was meant to be completed by the end of April
...

EFSF press release, “EFSF Board of Directors extends MFFA for Greece until 30 June
2015”, 27 Feb 2015
19
These are profits generated from the ECB’s holding of Greek bonds, which were
purchased in previous years
20
IMF staff report, “Greece: Fifth Review Under the Extended Arrangement Under the
Extended Fund Facility, and Request for Waiver of Nonobservance of Performance
Criterion and Rephasing of Access”, Jun 2014,p55,table 13, “fifth review”
21
Eurogroup statement on Greece, 20 Feb 2015
17
18

8

9

Greek debt crisis: background and developments in 2015

•

No “unilateral changes” from Greek government stopping
Syriza from implementing a number of the measures it had
campaigned on during the election
...
9 billion (£7
...
Greece had originally
floated the possibility that it may want to use these funds for
purposes other than bank recapitalisations
...


This provisional agreement was viewed by most observers as a “defeat”
for the Greek government given that most of its original demands that
helped it get elected were not included
...
24 It appears
that heightened concerns over the health of Greek banks pressured the
government to come to an agreement as quickly as possible
...
However, this
provisional deal still needed to be formally signed, agreed and
implemented
...
These included a commitment to reform
value-added tax (VAT) policy in order to boost revenues, fight
corruption, reduce the number of government ministries, review and
control public spending, and commit to not roll back privatisations that
had been completed
...
27 Where
necessary, national parliaments of Eurozone members including
This is summarised in their “Thessaloniki programme” of policies to reverse past
austerity measures
23
For a summary of opinion see “Tsipras Tamed as Economists Declare Greece Loses
Austerity Fight”, Bloomberg, 23 Feb 2015
24
“Greece and Europe: Outgamed”, The Economist online, 21 Feb 2015
25
ibid
...

The IMF and ECB also signalled their approval of the Greek measures,
although both expressed some reservations and emphasised that the
measures were only a starting point
...


2
...

Reform proposals from the Greek government were rejected by
creditors as being insufficient, while the Greek government rejected
creditors’ proposals for imposing too much austerity
...

Meanwhile, the other Eurozone countries and the IMF were reluctant to
lend more money to Greece if it didn’t commit to reforming its
economy and improving its public finances
...
30 The Greek
government rejected this characterisation and noted the large cuts
the austerity programme had already made to pensions
...
At the time of negotiations
there was a standard rate of 23%, and two reduced rates of 13%
and 6
...
The Greek government was reluctant to raise VAT
rates on items such as food and electricity, which were at the
lower rates
...
32 This plan was rejected
by creditors
...

The deal to extend the bailout removed this target but did not

ECB, ECB letter to the Eurogroup, and IMF, Letter by IMF Managing Director Christine
Lagarde to the President of the Euro Group on Greece, both 23 Feb 2015
29
See for instance: “Greece fails to reach initial deal on reforms with lenders”, Reuters,
31 Mar 2015, and “Greek Proposal on Bailout Standoff Not Acceptable, European
Officials Say”, Wall Street journal, 9 Jun 2015
30
“Starting to list; Greece and its creditors”, The Economist, 4 Apr 2015
31
“Plan on the cards for flat VAT rate of 18 pct”, Kathimerini (Greek newspaper) online
English edition, 28 Apr 2015
32
18 June 2015 blog post by then Greek Finance Minister Yanis Varoufakis
28

11 Greek debt crisis: background and developments in 2015

replace it
...
The difference between the two sides on
the new target was relatively small at 0
...
33
•

Labour market – creditors proposed further reforms to make it
more flexible, while the Greek government wanted to rehire some
of the public sector workers laid off under the austerity
programme and to raise the national minimum wage (which was
cut by 22% as part of the bailout programmes)
...
For example,
the then Greek Finance Minister Yanis Varoufakis’ attitude to
negotiations did not gone down well with a number of his counterparts,
with a number of unfavourable stories about him circulating in the
media
...
36 Some reports suggested that by 26 June the
differences between the two parties on issues such as pensions and VAT
were relatively small
...
5 billion in funding (none
of it new) to Greece was rejected by the Greek government on 26 June,
stating the reform plans linked to this proposed extension would be
deeply recessionary
...
39 The bailout programme,
along with the €7
...

The referendum and its consequences are examined in the next section
...
eu/rapid/press-release_IP-15-5270_en
...
July 5 referendum and
associated events
The Greek government held a referendum on the terms of a loans-forreforms deal offered to it by its creditors
...
The second Eurozone
bailout programme, and the funds earmarked from this, expired
...
5 billion debt repayment to the IMF at the end of June
...
The Greek electorate decisively voted against
the terms of the now-defunct bailout proposal, backing its
government’s position
...
1 Referendum and end of negotiations
Late on Friday 26 June, the Greek Prime Minister, Alexis Tsipras,
announced that Greece would hold a referendum on Sunday 5 July on
whether to accept or reject a recent loan-for-reforms proposal from the
creditor institutions
...

This followed a series of proposal, counterproposal and intense
negotiations in previous weeks and came ahead of a summit of
Eurozone finance ministers (the Eurogroup) the following day
...
41 This was rejected by the other 18 Eurozone members,
who blamed Greece for rejecting their proposals and breaking up
negotiations
...
This is indeed what happened
...

The referendum vote could best be seen as a way for the government,
in the event of a ‘No’ vote, to show its creditors that its position was
supported by the Greek population
...

The referendum may have also been called due to discontent within the
ruling Syriza party, and to avoid the possibility of any agreement with
creditors leading to a serious split within the party
...
2 Bank holiday and capital controls
introduced
Following the referendum announcement and the decision by the
Eurogroup to essentially suspend negotiations with Greece and let the
existing bailout programme expire, the European Central Bank (ECB) did
not increase its emergency funding of the Greek banking system
...
In order
to avoid this, capital controls limiting how much money could leave
Greek banks were introduced
...

The problems with the Greek banking system and more on the
measures introduced following the referendum announcement are
covered in the next section of this briefing
...
3 Government funding issues and default
on IMF loan
The Greek government is unable to access international financial
markets to borrow money at a sustainable rate of interest (hence the
need for the bailout loans)
...

The government up to this point managed to keep up with its debt
repayments and its domestic obligations to pay social security and
salaries via a combination of measures
...
46

Greek government ministers repeatedly said that if the government had
to choose, it will prioritise paying pensions and salaries rather than its
foreign debt repayments
...
5 billion loan
payment to the IMF
...

This was the first time a developed economy had ever defaulted on a
loan from the IMF
...
In other words, even if a country defaults on its
debts to others it still pays back the IMF
...
Greece needed
to repay the ECB €3
...
2 billion on 20 August
for expiring Greek bonds the ECB owned
...
4 Referendum result and aftermath
Greek voters decisively backed ‘No’, with 61% of the electorate backing
the government’s position rejecting previous draft proposals from its
creditors
...
This view was rejected by
the Greek government, who said the ‘No’ vote would boost chances of
receiving a favourable deal with creditors, when negotiations resumed
following the vote
...
His negotiating style had irked fellow Eurozone
finance ministers, and many thought that his departure may make it
easier for a deal to be struck
...

Crucially, for the first time in five years Greece was now not involved in
a Eurozone bailout programme
...
This meant that a new, detailed third programme needed to be
negotiated for Greece to receive financial assistance
...


“Varoufakis: Greece would prioritise pensions and salaries over IMF payment”,
Reuters, 20 May 2015
48
A full list of other countries that have defaulted on the IMF (as of Oct 2014) are
available in table 6
...
Greek banking system and
capital controls
The weakness of the Greek banking system means that it is reliant on
the European Central Bank for emergency funding
...
Banks were shut for three weeks and capital controls were
introduced in late June in order to stop Greek banks running out of
money
...
1 Greek banks reliant on funding from the
ECB
Greek bank balance sheets are plagued with very high levels of nonperforming loans (where the borrower is not making repayments to the
bank); the IMF estimates that 34% of the total value of all loans
provided by Greek banks at the end of Q4 2014 were nonperforming
...

Shut out of the interbank lending markets, Greek banks are heavily
dependent on funding from the European Central Bank
...
50 This channels a fixed
amount of funds to the Greek central bank which is then available to
Greek Banks
...
51 Changes to ELA funding need to be approved by twothirds of the ECB Governing Council
...
53

4
...
The ELA cap was raised
frequently by the ECB in June 2015 in order to meet accelerating
IMF, Financial Soundness Indicators, Cross-country tables – latest available data
[accessed 3 Aug 2015]
50
ECB press release, ”Eligibility of Greek bonds used as collateral in Eurosystem
monetary policy operations”, 4 Feb 2015
51
“Bank funding powers make Greece vulnerable to ECB pressure”, Reuters, 15 Feb
2015
52
The main decision-making body of the ECB comprised of six Executive Board members
and the heads of the 19 national central banks; at any one time 21 members have
voting rights – the six Executive Board members and 15 out of the 19 national
central bank governors (these are rotated)
53
“ECB Said to Allow Greek Banks 59
...
2 billion in
bailout funds to Greece
...
54
As the 30 June deadline to reach a deal approached further outflows of
deposits occurred
...

Box 1: Deposit outflows from Greek banks
Private sector deposits in Greek banks have fallen by €42 billion, or 25%, in the seven months to the
end of June 2015, to its lowest level in more than a decade
...
In June
alone, at the crisis deepened, almost €8 billion in deposits were withdrawn
...
56

Greek private sector bank deposits since 2007 (up to end-June 2015)
€ billion
250
200
150
100
50
0
2007

2008

2009

2010

2011

2012

2013

2014

2015

Note: Private sector referes to deposits held by corporations and households, i
...
excluding govt
Source: Bank of Greece statistics for deposits by sector, July 2015

Following the announcement of the referendum and the decision by
other Eurozone finance ministers to essentially suspend negotiations
with Greece and let the existing bailout programme expire, the ECB
decided to keep providing the Greek banking system with ELA
...

This decision, together with customers continuing to take money out of
banks over the weekend of 26/27 June, meant that in order to keep
banks from becoming insolvent capital controls limiting how much
money could leave Greek banks were introduced
...

The bank holiday and capital controls were formally announced on
Sunday 28 June by Greek authorities
...
Domestic electronic transactions were not
affected according to the government
...
3 Banks reopened but capital controls
remain
Following the 12 July agreement in principle for a third Eurozone bailout
agreement, the ECB raised its emergency funding for the Greek banking
system
...
58
Capital controls, however, remain in place although they were eased
somewhat on 20 July
...
59

“What Are Greece's Capital Controls?”, Bloomberg, 29 Jun 2015
“Greece reopens banks and pays off some debt in first steps towards normality”,
Guardian, 20 Jul 2015
59
“Capital controls are eased but companies see it as insufficient”, Kathimerini (Greek
newspaper) online English edition, 31 Jul 2015
57
58

Number 7114, 18 August 2015 18

5
...
Formal negotiations on the
detail of the programme were concluded in mid-August
...
It requires Greece to implement a reform
agenda including changes to the pension system and market-based
reforms of the economy to make it more competitive
...


5
...

The requested financial assistance programme would be last for three
years and be its third bailout package since 2010
...
61 A
meeting of all 28 EU leaders was also scheduled for later on 12 July
...
62
Mr Tusk made it clear that these meetings would be the final chance for
an agreement to be reached:
The stark reality is that we have only five days left to find
the ultimate agreement
...
But tonight I have to say loud and clear
that the final deadline ends this week
...


ECB threatens to remove emergency bank funding
In the week before the weekend summits, the European Central Bank
(ECB) left unchanged the emergency funding – Emergency Liquidity
Assistance (ELA) – it was providing to keep the Greek banking afloat
...
07pm entry, 7 Jul 2015
63
Ibid
...
64 In addition, Greece had a
€3
...
5 billion from its missed repayment due on 30 June
...
Either way, this would probably
eventually lead to Greece formally leaving the Eurozone (see section 7
for more on the potential consequences of ‘Grexit’)
...
2 July 12 agreement to start third bailout
The Greek government presented its reform proposals to its creditors on
9 July
...
65 The Greek parliament approved these plans early on
Saturday morning, 11 July
...
The meeting was meant to lay the groundwork for
Eurozone leaders to agree a deal the following day
...

Eurogroup president Jeroen Dijsselbloem said talks had been “very
difficult”
...

A further meeting of the Eurogroup was held on Sunday morning 12
July, followed in the afternoon by the summit of Eurozone leaders
...
The draft also contained the option – not
agreed by all creditor countries – that in the event of no agreement
being reached, Greece could be offered a “time-out” from the euro to
restructure its debt
...

Then, at around 9am on Monday 13 July, after 17 hours of
negotiations, an agreement was reached
...
42pm (UK) 12 Jul 2015
69
European Council statement, Remarks by President Donald Tusk after the Euro
Summit of 12 July 2015 on Greece
64
65

Number 7114, 18 August 2015 20

Terms of the agreement
The deal that was reached was an agreement in principle for a third
bailout programme of loans totalling around €82-€86 billion to Greece
in return for a series of reform packages
...

These conditions involved the Greek parliament legislating for a series of
measures, including VAT increases and some pension reforms (see next
section below for more)
...
70

In addition, a significant privatisation programme would be introduced
...
This revenue, targeted at €50 billion over the three years
of the bailout programme, will be used to recapitalise Greek banks (€25
billion), with any remaining money raised split equally for investment in
Greece and used to reduce Greek debts
...

The original German proposal for this €50 billion fund of Greek assets
called for it to be based not in Greece but in Luxembourg
...
A report in the
Financial Times stated that a disagreement between Mr Tsipras and
Angela Merkel, the German Chancellor, on the size and purpose of this
privatisation fund led to both deciding that no deal could be reached
...
72
The Greek government did get a commitment from the Eurogroup to
keep the possibility of debt relief on the table:

European Council statement, Euro Summit Statement 12 July 2015 [pdf]
Ibid
...
Dijsselbloem, President of the Eurogroup
after the Eurozone summit of 12 July 2015
72
“Greece talks: ‘Sorry, but there is no way you are leaving this room’”, Financial Times,
13 Jul 2015
70
71

21 Greek debt crisis: background and developments in 2015

[…] the Eurogroup stands ready to consider, if necessary, possible
additional measures (possible longer grace and payment periods)
aiming at ensuring that gross financing needs remain at a
sustainable level
...
In
other words, the total value of debt repayments will not be lowered,
just the time Greece has to make the repayments may be extended
...
74 Many noted that the terms of the
deal were harsher than those offered by creditors at the end of June
that were rejected by the government and the Greek electorate in the
referendum
...
The talks in June were related to
a final instalment on the second bailout programme, which expired on
30 June
...

Mr Tspiras stated that negotiations were difficult but he claimed some
successes too: financing over the medium-term, the potential for debt
relief and stopping the €50 billion fund of Greek assets being based
outside of Greece
...
He argued that the alternative of the Greek banking
system collapsing would have been worse:
The hard truth is this one-way street for Greece was imposed on
us
...
76

Now that an agreement has been reached, focus shifted to whether it
would be implemented given the anti-austerity rhetoric from the Syriza
...


European Council statement, Euro Summit Statement 12 July 2015 [pdf]
See for example, FastFT, “Now what? Reactions to the Greek deal”, 13 Jul 2015
75
Guardian, Greek crisis live blog 13 Jul 2015 12:20pm entry
76
“Greek PM: bailout deal must be implemented, even if "one-way street"”, Reuters,
14 jul 2015
73
74

Number 7114, 18 August 2015 22

5
...

On the night of 15 July, the Greek parliament passed a package of laws
as required
...
77

On 17 July, the German parliament voted to give the go ahead for
formal talks for the bailout programme to begin
...

On the night of 22 July, the Greek parliament passed additional
legislation that was required as part of the 12 July agreement
...
79
As a result, official talks between Greece and its creditors in drawing up
a full memorandum of understanding – the legal terms – of the loan
could begin
...
4 EU bridging loan to Greece
While the necessary steps to start formal negotiations on the loan from
the European Stability Mechanism (ESM) were being taken, Greece still
had severe funding issues
...
5
billion from the end of June and a further €456 million on 13 July 80) and
was required to make a debt repayment of €3
...

No money from the ESM was distributed to Greece until a full legal
agreement had been reached
...
In the meantime, an alternative funding arrangement was
needed
...
2 billion (£5
...
81 In a
matter of hours it was used to pay off its €2 billion arrears to the IMF

“Greece debt crisis: Eurozone deal laws backed by MPs”, BBC News online, 16 Jul
2015
78
“Creditors to start talks after Greece passes bailout bill”, AFP, 23 Jul 2015
79
EU Directive 2014/59/EU
...
5 billion debt repayment to the ECB
...

The €7
...
83 (€46
...
)
The €7
...


Financial protection from losses for UK and nonEurozone states
The decision to provide this loan to Greece also provided financial
protections to the UK and other non-Eurozone EU states
...
Under the decision,
the exposure of non-euro area member states will be fully
guaranteed by liquid collateral under legally binding
arrangements
...
84

The European Commission have also agreed to change EU regulations
for the future use of the EFSM so that financial guarantees for nonEurozone member states are always provided when a Eurozone country
receives financial aid
...
2 billion loan, nonEurozone countries including the UK will now not be liable for any
potential losses from EFSM loans to Eurozone nations
...
85

5
...
Talks between the Greek
government and the “quartet” of creditor institutions - the European
Commission, European Central Bank, IMF and European Stability
Mechanism (the Eurozone bailout fund) – were completed in a few

ECB Twitter account, 5
...
This was quicker than some had thought likely, with creditors
praising the Greek authorities attitude to negotiations
...
A
staff level agreement was completed on 11 August
...

The Greek government expressed optimism that negotiations could be
concluded before it is due to make a €3
...
If this doesn’t happen, then a second bridging loan
from the EU’s EFSM bailout fund would likely be necessary for Greece to
make this payment
...
87 A few Eurozone
countries require their parliaments to approve the deal, including
Germany’s on 18 August
...


5
...
2 above)
...


The programme also calls for Greece to run a public sector budget
surplus excluding debt interest payments (a primary surplus) over the
‘medium term’ of 3
...
If it does so, the debt-to-GDP ratio
will likely decline
...
As such, the terms of the
deal call for a gradually improving primary surplus of -0
...
5% in 2016 and 1
...
Even this 2015 target is ambitious
...


Financial assistance
In return for implementing this agenda, Greece will receive loans of up
to €86 billion (61 billion) over a three-year period
...

The first loan tranche from this third bailout is worth €26 billion (£19
billion) and will be distributed in a few stages
...
If all goes to plan this will be on 20 August, and
allow Greece to make a €3
...

A further €10 billion will also be provided immediately (20 August) for
bank recapitalisation
...

An additional €3 billion will be available for disbursement in autumn
2015 following the implementation of “key milestones” (read: reforms)
included in the Memorandum of Understanding
...

The IMF will initially not be involved in this programme
...
Some Eurozone countries, including Germany, are keen on the
IMF’s participation in this third bailout
...

The IMF has said it will only participate if Greece receives some form of
debt relief
...
Instead, debt
relief could take the form of delaying when Greece has to repay the
debt it owes
...
2 and 6
...


Implementation of deal
Now that the details of the programme have been agreed and are likely
to be signed off, the focus shifts on to its implementation
...
Important issues
While the third Eurozone bailout programme worth up to €86 billion
has been agreed, there are still a number of important issues that will
help shape its success or failure and, more broadly, Greece’s future
...


6
...

Syriza is itself a coalition of radical left-wing groups, and contains some
members who are resolutely against any climbdowns from the stance it
took during the January 2015 election campaign
...
89
The party’s radical Left Platform grouping regularly voice their
displeasure at the “blackmailing tactics” of Greece’s creditors and have
influence on the party via its Central Committee
...
Some members of the Left Platform have also suggested Greece
should default on its debt and leave the Eurozone
...

In two votes, on the night of 15 July and 22 July, the Greek parliament
passed a package of laws as required in order to start formal talks on
the new bailout of up to €86 billion
...
Between 35 and 40 Syriza MPs – out
of 149 – failed to vote for each of these legislative packages
...
92
The splits within Syriza have led to an emergency congress of the party
being scheduled for September
...
93 This, in turn, has resulted in
“Greek bailout: Government reveals economic reforms – but Syriza dissenters says it
has gone back on its election promises already”, Independent, 23 Feb 2015
90
“SYRIZA's Left Platform makes gains but proposal voted down”, Kathimerini (Greek
newspaper) online English edition, 25 May 2015
91
“Greece’s Governing Syriza Party Divided Over Debt Terms”, Wall Street Journal, 25
May 2015
92
“Greek PM Tsipras rallies Syriza backing before bailout vote”, Reuters, 22 Jul 2015
93
“Greece’s Syriza Will Hold Emergency Congress in September”, Wall Street Journal,
30 Jul 2015
89

27 Greek debt crisis: background and developments in 2015

speculation of the Prime Minister, who still has high approval rating
among the population, calling a snap election in the autumn
...
On the other hand, if a less radical Syriza wins
power following a new election, the prospects of the bailout agreement
being implemented and lasting the full three years may be
strengthened
...
2 IMF involvement in third bailout package
The 12 July 2015 agreement to start talks on a third Eurozone bailout
package includes a passage stating that Greece will “request continued
IMF support (monitoring and financing)” once the IMF’s current loan
programme ends in March 2016 (the IMF has paid out around €12
billion out the €28 billion available)
...
The head of the European Stability Mechanism (where the
Eurozone’s bailout loans will come from) has said that he expects about
€50 billion of the approximately €86 billion total bailout to ultimately
come from the ESM
...
97
The IMF – along with the European Commission, ECB and ESM - has
been involved in negotiating the terms of the new bailout with the
Greek government
...

The IMF has repeatedly called for debt relief for Greece and has said
that it would only support a loan programme that offers medium-term
sustainability
...
99
If there is no IMF involvement in this third bailout programme, then the
ESM, and therefore the other Eurozone countries, would have to
provide larger loans to Greece
...

One possibility is for an ESM agreement to be started before the IMF
has formally agreed to provide additional loans to Greece, as the IMF’s
current (second) bailout programme expires in March 2016
...
This would then enable the IMF to take part in the
third bailout programme in 2016
...
3 Debt sustainability and debt relief
As noted in section 1
...

Unlike other advanced economies (such as the UK), most of Greek’s
stock of debt is owed to “official institutions” such as the IMF,
European Central Bank and other Eurozone countries as part of their
bailout programmes
...

The radical left-wing Syriza-led government, and most economists, have
argued that this debt burden is simply unsustainable and that some
form of debt relief is needed
...
In other
words, what is the actual cost of holding this debt
...
The OECD estimates that in
2015 this amounts to 4
...
2%) and Italy (4
...
5%)
...
A 14 July debt sustainability analysis
from IMF staff unequivocally states this:
The financing need through end-2018 is now estimated at Euro
85 billion and debt is expected to peak at close to 200 percent of
GDP in the next two years, provided that there is an early
agreement on a program
...
101

The analysis blames previous Greek government for failing to implement
reform measures in past bailout programmes which it says led to higher
debt levels
...


100
101

OECD Economic Outlook June 2015, Annex table 31 [access 13 Aug 2015]
IMF, Greece: An Update of IMF Staff’s Preliminary Public Debt Sustainability Analysis,
14 Jul 2015

29 Greek debt crisis: background and developments in 2015

The 12 July Eurozone leaders’ summit, where a deal was in principle
agreed to a new third bailout programme, stated that some form of
debt relief could be granted to Greece by the Eurozone
...
102 Instead,
debt relief is likely to take one of the following forms:
•
•
•

Longer grace periods, pushing back the date of when Greece
makes its first loan repayment;
Extending the duration of the loans from the bailout programmes,
meaning Greece has longer to pay back the loans (loan durations
are already very long);
Lowering the interest rate of the loans Greece has to repay,
although there isn’t much scope to lower them much further as
they are already very low
...
The text of the Euro
summit agreement also states that these measures would only be
available to Greece once it has implemented a series of reforms and
after the first review of the new bailout programme has been
conducted successfully
...


6
...
Indeed, early evidence from business surveys
for July show a collapse in trade and confidence
...

Analysis conducted by the European Commission, European Central
Bank and the ESM bailout fund forecast Greece’s economy to contract
by 2
...
3% in 2016, before growth of
2
...
104 In May 2015, the European Commission forecast
growth of 0
...
9% in 2016
...
This is recognised in the bailout
agreement as agreed by the creditor institutions and Greece, which calls
for primary budget balances – government spending excluding debt
interest payments, minus tax revenues – of a a deficit of 0
...
5% in 2016, 1
...
5% in
European Council statement, Euro Summit Statement 12 July 2015 [pdf]
For example, the Markit survey of purchasing managers in the manufacturing sector
showed a record contraction in July
...
106 These are much lower targets than in the previous
bailout agreement, reflecting the deterioration in economic conditions
...
5 Banking sector recapitalisation
One of major issues that has to be addressed in the bailout programme
is the need to recapitalise the Greek banking system
...
These are
loans where the borrower is not making repayments to the bank who
issued the loan
...
107 The imposition of capital controls in late June
(see section 4 for more) and its negative impact on the economy will
likely result in this figure rising
...

The terms of the third Eurozone bailout programme state that Greek
banks require up to €25 billion in additional capital and that capital
shortfalls should be addressed fully by end 2015
...
109

6
...
2 billion debt repayment to the
European Central Bank on 20 August
...

Greece cleared its arrears with the IMF on 20 July, but still has a further
€3
...
5
billion in September alone (over four separate days)
...


Leaked copy attained by Financial Times of staff level draft agreement of
Memorandum of Understanding for a three-year ESM programme, 11 Aug 2015
107
IMF, Financial Soundness Indicators, Cross-country tables – latest available data
[accessed 3 Aug 2015]
108
Leaked copy attained by Financial Times of staff level draft agreement of
Memorandum of Understanding for a three-year ESM programme, 11 Aug 2015;
Eurogroup, Eurogroup statement on the ESM programme for Greece, 14 Aug 2015
109
For more see comment pieces from George Magnus, “Greek crisis: can the deal be
banked?”, Prospect magazine, 11 Aug 2015; and Hugo Dixon, “How to fix Greece’s
banks”, Reuters Breakingviews, 10 Aug 2015
110
"Greece’s Debt Due: What Greece Owes When", Wall Street Journal, 7 Aug 2015
106

31 Greek debt crisis: background and developments in 2015

Greece debt repayments due from 18 August 2015 to end December 2015
€ billion

ECB

7

IMF

Treasury Bills (refinance)

6
5
4
3
2
1
0
Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Source: Wall Street Journal, "Greece’s Debt Due: What Greece Owes When", 5 Aug 2015

Number 7114, 18 August 2015 32

7
...
Nevertheless,
many think that over the medium-term ‘Grexit’ is still possible
...


7
...
The European Central Bank
(ECB) is providing substantial amounts of emergency funding and
capital controls are in place (see section 4 for more)
...

In addition, with the Greek government short of money, at some point
it might be unable to pay salaries, state benefits and suppliers with
euros and instead issue IOUs (a form of parallel currency)
...

However, given the circumstances in which they were issued, those
receiving them would likely prefer to be paid in euros
...
111
IOUs could likely only be used as a short-term measure, as confidence in
this new monetary system would likely be low
...
This then may lead to Greece formally leaving the
Eurozone and introducing a new currency
...

This would make it much more expensive for Greece to import goods
and services from abroad and therefore lead to a rise in inflation
...

How much debt Greece would actually default on would depend on a
number of factors
...
Germany, as the
“Here's the brutal reality for ordinary Greeks if the government defaults”, Business
Insider, 19 May 2015
112
For more on IOUs, or scrip, see “Scrip tease: Greece could alleviate its shortage of
cash by issuing IOUs, but only for a time”, The Economist, 26 Apr 2015
111

33 Greek debt crisis: background and developments in 2015

largest economy in the Eurozone, may face total losses of over €50
billion and possibly more
...

There is, though, disagreement among economists and commentators
on the extent of possible ‘contagion’ spreading to other Eurozone
countries and to the wider Eurozone economy
...
114

7
...
Greece, for instance, accounts for
only 0
...
115
The UK, however, would likely be affected indirectly via the financial
markets and via the wider Eurozone economy
...
An orderly exit might
involve the EU institutions making commitments to help Greece
transition to its new currency, while pledging to support other Eurozone
countries - and banks - who might now come under pressure
...

A disorderly Grexit where Greece is forced to introduce a new currency,
perhaps shortly after the collapse of its banking system, and with
minimal intervention by European authorities, could lead to a prolonged
reaction on financial markets
...

Eurozone economy
Another channel through which Grexit could affect the UK economy
would be via the Eurozone economy
...
Falling business and consumer confidence could
knock the Eurozone back into recession
...
3; data for 2013 (latest available on 22 Jun 2015) and
Eurostat, national accounts figures for 2014 [accessed 22 Jun 2015]
113
114

Number 7114, 18 August 2015 34

Confidence in the UK may also be hit given the uncertainty, potentially
causing businesses to hold back investments and consumers to rein in
spending
...
116

In June, Chancellor George Osborne has also stated that the
government has taken steps to limit the impact of Grexit:
In the UK we've taken the measures to increase our economic
security so we can deal with risks like this from abroad
...
117

116
117

Bank of England Inflation Report Q&A,13th May 2015, page 24
“Osborne: EU must 'prepare for the worst' in Greek crisis”, ITV News, 19Jun 2015

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2015

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