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Analysis
Brexit scare helps the debtors

Brexit scare helps the debtors

Greece and other EU trouble spots

by Vicky Pryce in London

Sun 22 May 2016

In a nervous environment where Europe wants Britain to vote to stay in on 23 June, Greece holds important cards in its poker game with creditors over managing and rescheduling its debts. The spectre of Brexit is worrying the EU and the Commission enough to ensure that Brussels is taking a more conciliatory approach on the fiscal front across several debtor member states, not just Greece.

The Greeks are anxious to ensure a return to stability as quickly as possible. An agreement with creditors would unleash funds that Greece needs, pave the way for an end to capital controls and help the Greeks gain from entering the European Central Bank's quantitative easing programme.

Benefiting from leverage generated by everyone's desire to keep another major Greek squall out of the headlines, Athens has a good chance of winning the right deal, even at the expense of prolonging negotiations beyond the next Eurogroup meeting on 24 May. A primary Greek preoccupation is to allow release of early money so it can in July repay bonds acquired by the ECB – while at the same time paving the way for sustained debt relief.

Greece, still struggling to demonstrate it can implement restructuring to lower deficits and debt on a sustainable basis, is not the only economic and political trouble spot.

Spain, which is subject to excessive deficit procedures, is holding elections on 26 June, three days after the UK plebiscite. Mariano Rajoy, the prime minister, who is quoted as saying that Britain leaving would be 'a dramatic rupture', is emphasising the need for more growth-orientated policies if he forms a new coalition government.

Portugal, also under review, is coping with stagnant growth. The Brexit threat has delayed a decision on Commission deficit procedure sanctions against both these countries.

France, facing difficulties pushing through labour reform, has been given time extensions for meeting deficit reduction targets. Italy has been allowed to ease its fiscal stance by an extra 0.8% of GDP through lower taxes, just as it is suffering from GDP forecast downgrades.

The euro area may face further downward growth revisions if instability emerges after a UK vote to leave.

The Greek government is in the process of passing more bills through parliament, including painful further tax increases. It is due to pass a fiscal corrections mechanism for automatic further measures should current reforms fail to deliver the forecast fiscal improvement. And Greece can claim success at last in finally having a debt relief deal openly discussed.

The International Monetary Fund, which has made debt relief a condition for funding any part of the latest bail-out package, is reportedly suggesting rolling over Greek bonds' maturities until 2080, allowing a grace period to 2040 and fixing long-term rates. The European Stability Mechanism may buy back part of Greece's high-interest debt from the IMF and replace it with lower-interest debt from the ESM.

Getting the right long-term solution is a high stakes enterprise. Greece wants the UK to stay in the EU to counter Germany's influence. Yet Athens sees no reason why it cannot exploit for its own purposes the general scare about a British exit.

Vicky Pryce, a former Joint Head of the UK Government Economic Service, is on the board of the Centre for Economic and Business Research and is a Member of the OMFIF Advisory Board. She is the author of Greekonomics: the euro crisis and why politicians don't get it, published by Biteback Publishing. This is No.64 in the series – the 100th article will appear on 23 June.

OMFIF’s series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We are assuring a balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.

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