Greece’s successive bailouts have only met their objectives to a limited extent as economic growth remains weak, debt has increased and banks’ ability to lend is still restricted, according to a report by the European Union’s auditors.
While the lifelines ensured the country could meet its financial obligations and improve its budget situation, they failed to achieve their main goal of full market access for the continent’s most indebted state, according to the examination by the Luxembourg-based European Court of Auditors. The report focused on how the European Commission, the EU’s executive arm, helped oversee Greece’s three rescue programs.
“These programs promoted reform and avoided default by Greece,” Baudilio Tomé Muguruza, the member of the watchdog responsible for the report, said in a statement. “But the country’s ability to finance itself fully on the financial markets remains a challenge.”
The report is the first to offer such an in-depth look at the design and implementation of Greece’s three cash-for-reforms programs, highlighting issues that have often been brought up in criticisms by Greek officials and other observers. It looks at the bailouts signed onto by Greece in 2010, 2012 and 2015.
The examination comes at a sensitive time for government in Athens, which is seeking to successfully exit its third bailout next summer and is currently in the middle of another round of negotiations with its creditors. The success of the current program is critical for the Greek administration, which has seen its political capital evaporate in the face of painful reforms and which is counting on an economic rebound to regain its popularity.
For the country’s euro-area creditors, too, failure of this rescue program could have heavy consequences, raising doubts about whether the currency union is fully equipped to handle such a crisis.
While the audit focuses on the commission, the EU body is only one part of the so-called troika of monitors — including the International Monetary Fund and the European Central Bank — that have been supervising Greece’s successive rescue programs. The European Stability Mechanism, the euro-area bailout fund, has also joined the creditors’ group for the third and latest Greek bailout.
The auditors’ report found that the conditions set out in the bailouts were “neither sufficiently prioritized by importance nor embedded in a broader strategy for Greece.” Their economic assumptions were “poorly justified,” the report also said.
The report points out a mixed picture in the design and implementation of different economic overhauls. “Reforms to taxation and public administration brought fiscal savings, but the implementation of structural components was much weaker,” it said.
Another issue highlighted in the report was insufficient coordination across different policy areas. One example given is the lack of an assessment of how fiscal measures such as property taxes would additionally affect banking debtors’ solvency and, in turn, the market value of banks’ loans, essentially failing to draw the link between the impact of tight fiscal policies on the health of the banking sector.
The auditors cut the commission some slack, saying that external factors such as political instability in Greece also affected the management of the programs. It cited the six elections the country went through from October 2009 until January 2015 and a referendum in July 2014 as factors contributing to the uncertainty of the programs’ future and the progress of the negotiations.
The report gives recommendations for the commission including on how to better prioritize the conditions set out in its bailouts and to ensure that such programs are part of a growth strategy for the country.
In its response, the commission said it is “open to constructive criticism and well-founded recommendations on how improvements can be made in the design and implementation of financial assistance programs” and intends to build on the changes identified. It added that in many cases its role was complementary not only to that of other institutions but also to bodies such as the Eurogroup — as the powerful group of euro-area finance ministers is known.
Not Another One
With Greece’s third financial lifeline set to expire in August, both Athens and European governments are trying to avoid a politically toxic discussion about another bailout package, which would come with strings attached. A rally in Greek government bonds on the back of a nascent economic rebound and the promise of additional debt relief could help avoid another rescue, even as the country has yet to fully regain market access.
The Greek government on Wednesday launched an unprecedented bond swap totaling 29.7 billion euros ($35 billion) aimed at boosting the liquidity of its debt and easing the sale of new securities in the future. The debt swap is a step toward the country’s full return to markets required to avoid a new refinancing program. The government plans to tap the market in 2018 to raise at least 6 billion euros to create an adequate buffer to honor its obligations, an official previously said.
After more than seven years of relentless belt-tightening, Greece is now running the highest budget surplus of all advanced economies when adjusted for the economic cycle, according to the IMF. Under the bailout Prime Minister Alexis Tsipras signed in 2015, the country legislated additional austerity measures equal to 4.5 percent of its gross domestic product, or about 8 billion euros, according to the commission. Another fiscal package equal to 2 percent of GDP will kick in after 2018.