Alexis Tsipras’s Syriza government in Greece failed in 2015 to secure write-downs on the country’s national debt. That could change this year, despite objections from Enda Kenny and Michael Noonan.

A year ago, in January 2015, the radical left Syriza party assumed control of the Greek government after an election campaign that promised voters an end to austerity.

Prime Minister Alexi Tsipras (pictured) and his colourful finance minister Yannis Varoufakis believed their mandate would force the troika of lenders - the International Monetary Fund, the ECB, and the European Union - to write off a third of Greece’s national debt. Foreign officials were expelled from Greek ministries as Varoufakis set about putting his favoured game theory into action.

One year later and Syriza’s cough has been softened. Varoufakis convinced Tsipras that the lenders would blink if Greece got serious about threatening default.

The game plan was that lenders would cave in the face of Greece’s exit from the single currency, on the basis that Grexit would pull down the entire euro currency. But Syriza had seriously under estimated a very simple reality: a functioning economy depends on cash in the banks, and when the cash runs out the game is up.

In Association with

That’s what happened in June 2015 and last July Tsipras raised the white flag. Greece signed up for another three-year bailout, securing a pledge of €86bn in fresh funding, most of which is going to service existing debt and recapitalise pillar banks.

Unemployment

The latest fix has done nothing to shore up the economy, which contracted through 2015. Unemployment currently stands at 24% and three-quarters of Greece’s 1.2 million jobless have been out of work for at least 12 months.

Yannis Varoufakis was thrown overboard last summer but in September 2015 elections Syriza was returned to government, in a new coalition arrangement with a very slim majority. Despite the accusations of sell-out, Greek voters have kept faith with Tsipras and in 2016 he may finally be able to deliver on his promise of debt relief.

Greece’s creditors have taken a haircut before. When the troika sanctioned a €130bn bailout for Greece in 2012, private investors accepted a haircut of more than 50% on about €200bn of Greek bonds they held.

The IMF, part of the 2012 troika bailout, had misgivings about participating in a new round of financial aid unless there was also downward adjustment in the debt owed by Greece to the European Union.

For the EU’s member states, especially Germany, haircuts on inter-state lending was a red line issue. The fear was that if Greece secured debt relief then other indebted countries like Ireland would demand one too.

Troika bailouts are implemented on a drip-feed basis, with money released as programme countries meet the bailout conditions. The 2012 bailout for Greece was winding down when Syriza came to power in January 2015 and conditionality was immediately made clear to Tsipras and his colleagues.

Capital Flight

In February 2015, the European Central Bank pulled its ongoing credit facility to the Greek banks, obliging them to tap Emergency Lending Assistance instead. In the next three weeks, Greek depositors withdrew €8bn from the banks, adding to the €16bn capital flight that occurred in the two months before Syriza’s election victory.

In March 2015, the Syriza government decided to give free food to 300,000 poor people. In response, the EU lenders withheld the last €2bn pledged to Greece under the 2012 bailout. Economy minister Euclid Tsakalotos replaced Varoufakis as lead negotiator with Brussels, and in June Greece upped the ante by stopping repayments to the IMF.

With the troika bailout expiring at the end of June, the run on Greek banks intensified, as the middle class scuttled their precious euros abroad or under the mattress. With the bank vaults emptying, the ECB ordered Greece to close the banks and limit ATM withdrawals to €60 a day.

After June 30, Greece was in no-man’s land. If it wanted to, the ECB could cease its life support for Greece’s banks. In the midst of the turmoil, Tsipras called a referendum asking the voters whether they wanted another bailout and more austerity. Unsurprisingly, 61% voted No, but the vote was meaningless. By July 17 the Tspiras government caved completely to EU conditions for another bailout.

Under the latest bailout deal for Greece, funding of €86bn was sanctioned by EU member countries. Of the first tranche of €26bn, €16bn was for the state and €10bn to recapitalise the banks.

Humanitarian Crisis

That first €16bn for the state has now been paid over. A payment of €1bn in December was only made after the Syriza government scrapped a package of social justice measures, intended to cope with what Tspiras described as a “humanitarian crisis” in Greece.

To secure bailout funds, the government has also been implementing measures to deal with non-performing business loans, privatise the national electricity grid operator and link public sector pay to performance.

Further drawdowns from the EU bailout fund in 2016 are dependent on reforms to Greece’s state pensions.

In the meantime, Greek depositors are voting with their feet. Even as the EU pumps capital into the pillar banks, deposits held by households and businesses in Greek banks are 26% lower now than a year ago. Though the country is subject to capital controls, deposit withdrawals have continued in recent months and credit contraction has picked up speed too.

In recent weeks, Tsipras has indicated that he is squaring up for another scrap with lenders. Instead of cutting pensions, his government wants to raise employer social insurance contributions.

Budget Surplus

The measures being demanded by lenders are aimed at delivering a primary budget surplus target of 3.5% of GDP, excluding interest payments, by 2018. Greece’s Central Bank says the country is three-quarters the way down that path, but the final slew of austerity measures will challenge the Syriza coalition in the coming weeks.

Jeroen Dijsselbloem, the Dutch finance who leads the EU’s group of finance ministers, said recently that when Greece implements pension reforms demanded by creditors, that will trigger the first review of the latest bailout programme.

“There can only be a successful completion of the first review if there is an agreement on all the open issues, and the pension reform is the biggest one,” said Dijsselbloem.

Amid this ongoing squeeze, the main glimmer of hope for Tsipras seems to be the International Monetary Fund. With the new EU bailout funding, Greece resumed its IMF repayments and the debt will be cleared by March 2016.

Tsipras wants a new IMF programme and Greece’s creditor nations want the IMF involved again too, as Germany rates the IMF’s expertise in economic restructuring a lot higher than the EU Commission’s.

Debt Restructuring

For some time now, senior IMF officials have made their view clear that Greece cannot continue to labour under its mountain of national debt. The US Treasury, the IMF’s largest shareholder, has spoken of the need for “kicking off the conversation on a debt restructuring”.

The preferred option for Greece’s European creditors, including Ireland, is more interest-rate reductions on loans and extending the maturity of those loans. That won’t do for the IMF: either Europe’s governments take a haircut or they’re not coming back.

At end-year 2015, Greece’s indebtedness to the European Financial Stability Facility amounted to €153bn, nearly half the country’s gross debt of €317bn. If Angela Merkel really wants the IMF on board to try and sort out Greece for the final time, the German chancellor may have to buy into the idea of a debt write-down for Greece of up to €100 billion.

The quid pro quo for Greece might be tightening up its island borders instead of providing free ferries and trains to shuttle hundreds of thousands of migrants towards northern Europe.

Such a debt write-down would be a big political event for Ireland in 2016. Should Greece secure major debt concessions, and Tsipras is recast as a hero of the European left, opposition parties in Ireland won’t be slow to wonder aloud why there has been no relief for Ireland’s socialised bank debt.

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