By Tony Connelly, RTÉ Europe Editor, Athens

Within hours of Syriza’s stunning electoral victory the gulf between popular expectation in Greece and official generosity in Brussels and Berlin grew alarmingly.

Addressing jubilant supporters in the centre of Athens on victory night, party leader Alexis Tsipras declared: “Greece is leaving behind catastrophic austerity, fear, authoritarianism.  It is leaving behind five years of humiliation and grief.”

By contrast, the message from eurozone finance ministers in Brussels just over 12 hours later could be summed up as: “we respect the result, we’ll do what we can to help, but don’t expect any debt write-down.”

But for Syriza, a debt write-down is exactly what the Greek electorate has demanded.  Its view, and the view of a growing number of international economists, is that Greece’s debt is actually no longer sustainable and must be cut.

Syriza’s view is also that Greece can no longer sustain further budget cuts and tax increases.  “We cannot take it any more,” one supporter told me on election night at a Syriza celebration.  “We are no longer afraid.  We are at the bottom.”

The figures bear that out.  Since the crisis began Greece’s economy has shrunk by over a quarter.  Unemployment has risen to 27% (over 60% for young people), more than three million people live on or below the poverty line.  Comparisons have been made with the 1930s US Depression.

And yet there is no appetite in Brussels and Berlin for debt forgiveness.

So, are we on a brutal collision course which could result in a default and a Greek exit from the eurozone?

There may be more room for optimism than might be expected.

The defeated Greek prime minister Antonis Samaras had staked his career on getting Greece out of the bailout last December.

The country had undergone five years of austerity, and he gambled that just about enough cuts and been made and reforms implemented – at the insistence of the Troika of the European Commission, IMF and ECB – to trigger the final €7.2 billion bailout tranche and to liberate the country from the depredations of the financial rescue.

It was a gamble that failed on two counts.

First, the financial markets took fright when Mr Samaras announced that Greece would exit the bailout without a precautionary credit line.

Secondly, the Troika was unhappy that Greece wanted to bank the last €7.2 billion while at the same time kicking the most politically unpalatable measures into touch.

“The Greek government was suffering from reform fatigue,” says one source familiar with the negotiations.

With the deadline for Greece complying with the terms of the bailout coming and going, eurozone finance ministers reluctantly agreed to prolong the process by a couple of months.


But what were the issues holding things up?

The main problem was the country’s fiscal situation.

Under the terms of the Memorandum of Understanding, Greece was expected to run a primary surplus of 3% of GDP in 2015 (a primary surplus is the budgetary situation minus what the country pays in interest when servicing its debt).

In 2014 the primary surplus had reached 1.5% of GDP.  EU officials had forecast that stronger economic growth in Greece last year would lift the surplus towards the 3% target.  But by late last year the target wasn’t going to be reached, partly because tax revenues were not as strong as expected.

Ironically, the fiscal gap was not that much.  It was between €1-€2 billion.  The Troika wanted Greece to come up with additional cuts.  It was up to the government as to where those cuts would be found.

The Troika was also unhappy with reforms on the VAT side and measures to reduce inefficiencies.  There further demands on the sale or restructuring of state enterprises, on the energy market, on licences for permits and on pensions.  “There was still considerable recourse to early retirement,” says one official.  The Troika was looking for incentives to keep people in employment for longer.

There was also unhappiness on the public sector wage bill, in particular the structure of salary scales.  In the Greek civil service those with a university degree and those without are on a different pay scale.  However, that scale takes no account of what work the employee does, and how well they do it.

There was more work to be done on tax reform.  Officials were pushing for a simplification of the tax code, something that hadn’t been achieved for decades.

Ultimately, Greece’s international lenders felt that too many issues had been left open.  They were unwilling to conclude the bailout and release the cash.

An extension was granted until 28 February, but that had it’s own political ramifications.  Without his prize of declaring a bailout exit the outgoing prime minister was losing support.  The government’s attempts to vote through a new Greek president in December failed on the third attempt, thus triggering a general election.

The upheaval had its own impact on the budgetary situation.  Tax revenues slipped, spending by consumers fell.  Deposits began leaving Greek banks.  “In Greece people strategically withold tax when an election is coming up in the hope that a new government will lower taxes,” says one official.

As we all now know, Syriza romped to victory on a campaign capitalising on a weary electorate sick of austerity and the decline of living standards.

But now that Syriza has been elected, how will they fit in to the 28 February deadline?

The most likely option is that the deadline will be extended.  A Syriza MP, George Katrougolos, told RTÉ that Syriza would push for a delay until the summer in the hope that the entire bailout package would be renegotiated, although he added that Mr Tsipras wouldn’t do anything unilaterally.

Greece has enough money until then, but only just.  It’s funding requirements this year include a debt redemption on 1 March worth €4.3 billion, plus two payments worth €3.3 billion each to the ECB in July and August.

During the election campaign Syriza’s mantra was “no new measures.”  Alexis Tspiras repeatedly described the austerity measures accompanying Greece’s €240 billion bailout as “fiscal waterboarding.”

Ironically, the big budget cuts demanded of the troika have already been achieved.  That could provide both sides with some room to manoeuvre.  Much of the heavy lifting that remains is on VAT, pensions and public sector pay.

Whether a Syriza government can stomach further reform there remains to be seen.  The party has promised to restore civil service jobs and to increase pensions.  It will also be reluctant to increase VAT.

Where Syriza and the Troika will see eye-to-eye is on tax evasion.  Mr Tsipras has vowed to crack down on Greece’s notorious class of tax-evading oligarchs and shipping magnates.  The view of the Troika is that this is welcome, but it won’t be easy to deliver the kind of revenue the country needs.  “These oligarchs will have the best lawyers,” says one source close to the negotiations.


Officials insist that, in fact, the fundamentals of the Greek economy are “not bad.”  The country returned to growth last year and it has regained some of the the competitiveness lost during the first 10 years of monetary union.

Greece’s banks have been well-capitalised and passed the recent ECB stress tests.

The sustainability of Greece’s debt is another moot point.  At 175% of GDP the debt is said to be unsustainable.

However, when taking into account cash that Greece was obliged to put aside under the last private sector debt restructuring, and the interest rate cuts and maturity extensions granted in 2012, the net debt level could be around 120% or even lower.  That is the same as Ireland’s and is lower than Italy’s, levels that are not considered unsustainable for those countries (Japan’s debt is 250% of GDP).

The big worry, of course, is that if deflation deepens it will make the debt harder to repay.  No doubt Mario Draghi had one eye on that when he launched his massive Quantitative Easing programme on 22 January.

However, Greece has won significant concessions.  The average interest rate on the EFSF loan (ie the loans backed by other eurozone countries) is one basis point over the borrowing cost, which these days is 0.2%.

The average maturity of Greece’s loans is over 16 years, with the last loan expiring in 2054.  Bilateral loans under the country’s first bailout worth €54 billion had their maturities extended from 2026 and 2041.  Their interest rates were cut in 2011 and 2012.

A further concession was the decision by the ECB and national central banks to return the profits on Greek bonds to the Greek state.  That will actually lower the country’s financing needs by a total of €9 billion between 2013 and 2016.

In fact, in 2014 Greece’s interest payments amounted to 2.6% of GDP.  By contrast, Ireland, which has a much lower gross debt pile, paid the higher amount of 4.1% of GDP.

For these reasons it will be difficult for Syriza to convince sceptics in Berlin, Frankfurt and Brussels that the debt is, indeed, not repayable.

That’s not to say that there is no soul-searching about the impact that six years of austerity on the economy.  The IMF thought that economic growth would start to sprout in 2013, with unemployment falling and economic activity picking up.

The IMF has, in fact, ruefully admitted that the multiplier effect of deep austerity was worse that originally calculated.  One EU source has also conceded that “the pace of consolidation was excessive.”

However, the view is that while excessive cutting occurred in 2013 and 2014, that won’t be the case in 2015.

Will this provide everyone – on both the Syriza and the troika side – with sufficient cover to find an accommodation that will save sufficient face?

Taken in the round there maybe enough there, depending on how it is dressed up for public consumption.  If the heavy cuts have already been done, if Greece’s debt is more sustainable that people might believe, and if the fundamentals of the Greek economy have, actually, improved, then it might be possible.

But that’s an awful lot of IFs…

The over-riding impetus, one would assume, is that no-one wants a Greek default and a messy eurozone exit, not on the Greek side, and not in Brussels or Berlin.

That means that the “extend and pretend” approach will likely prevail.  Germany does not want populist parties in other peripheral countries to feel that they can follow in Syriza’s footsteps and tear up the notion that financial support requires tough economic reforms and budget cuts.

But they are dealing with an entirely new political reality in Greece.  Syriza’s idea of renegotiating Greece’s debt is already entirely different from Brussels’ idea.

The party’s interests have never been aligned with the troika’s, in the sense that the outgoing centre right New Democracy’s occasionally were.  The coalition also contains the unpredictable right-wing Independent Greeks, a fringe party virulently opposed to the Trioka.

It may have been one thing to convince politicians to grudgingly sign up to reforms when mainstream parties were in charge, but it may be an entirely different prospect with Syriza, 30% of whose members are thought to be ultra-left.

It’s going to be an interesting six months…

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