Greece rid of budget watch but inflation and energy woes bite

With more of a whisper than a resounding clang, Greece has shed another restriction dating to its painful financial bailout years. Saturday’s formal end of “enhanced surveillance” by European Union creditors means the country will no longer face quarterly scrutiny of its public finances to win debt relief payments.

That gives Prime Minister Kyriakos Mitsotakis’ center-right government greater freedom over the budget at a time when Greece, like all of Europe, is struggling with a post-pandemic cost-of-living and energy crisis triggered by Russia’s war in Ukraine. As Moscow has cut back natural gas to Europe, energy prices have surged, fuelling galloping inflation and threatening to plunge Europe into recession.

Nevertheless, Greece - like fellow bailed-out EU members Spain, Portugal, Cyprus and Ireland - will still be monitored by its creditors while paying back its debts. In Greece’s case, that will take another two generations, with the last loans due for repayment in 2070.

Wolfango Piccoli, a co-president and director of research at Teneo consultancy who has covered Greece’s financial crisis for years, said the end of enhanced surveillance is not likely to have meaningful impact.

“It is mainly a technical matter that most investors are expected to ignore,” he said.

While Mitsotakis’ government may try to score domestic political points with the exit from enhanced surveillance, “this will be a futile exercise,” Piccoli said.

“The vast majority of the public is focused on the cost-of-living crisis,” he said.

That is true for Efthymia Paidi, a 23-year-old central Athens florist who grew up during Greece’s financial crisis and doesn’t feel much has changed since.

“I think the crisis is essentially continuing, it never ended,” she said. “What I see is a constant repetition. ... Unemployment is still high and salaries are low, while the cost of living is high.”

Saturday’s milestone marks exactly four years from the end of the international loan programme that left Greeks beaten down but still members of the European Union and its common currency, the euro. The Greek crisis roiled global markets and pushed EU unity to its limits.

Investors stopped lending Greece money in 2010 after Athens acknowledged misreporting key budget data. To keep the country afloat, its European partners and the International Monetary Fund approved three rescue loan programs lasting from 2010 through 2018 worth a total 290 billion euros ($293 billion).

In exchange, creditors exacted what many Greeks still see as a pound of flesh: deep state spending and salary cuts, tax hikes, privatizations and other sweeping reforms aimed at righting public finances. The economy contracted by more than a quarter, unemployment spiked to almost 28% and skilled professionals emigrated in droves.

The programs led to balanced budgets and a successful return to government borrowing from international markets. Last year, the economy recouped most of 2020’s pandemic-induced 9% contraction and is forecast to grow 3.5% this year amid an expected bumper tourist season.

The downturn and COVID-19 relief measures pushed Greece’s public debt to a dizzying 206% of economic output in 2020, but it dipped in 2021 and is expected to reach 185% this year.

The European Commission, the EU’s executive arm, said that “as a result of Greece’s efforts, the resilience of the Greek economy has substantially improved and the risks of spillover effects on the euro-area economy have diminished significantly.”

“Maintaining Greece under enhanced surveillance is no longer justified,” it added.

But challenges remain, many outside Athens’ control. Inflation hit 11.6% in July, down slightly from an earlier three-decade high but still higher than the 19-country euro area’s 8.9%. While state subsidies are cushioning households and businesses from mounting energy bills for now, prices of gas, fuel and power are expected to rise further in the winter, like the rest of Europe. Plus, unemployment in Greece was nearly 15% last year and is only expected to ease to single digits in 2024.

In a lingering reminder of the crisis years, Greece’s credit rating remains below investment grade, raising the cost of borrowing from international markets. However, the bulk of the country’s debt is held by its European partners on benign terms and Athens hopes to regain investment grade next year.

Piccoli from Teneo doubts the exit from enhanced surveillance “will make much of a difference in relation to a possible credit rating upgrade in 2023.”

The country needs to press ahead fast with some grassroots reforms - including speeding up the creaking justice system, eliminating bureaucracy and tackling lingering corruption - that fell between the cracks during the bailout years, Greek public administration expert Panagiotis Karkatsoulis said.

“The end of the surveillance period may mean - and I wish that it means - a new era connected with the reforms,” he said. “Without the reforms, (it would be) more a symbolic (move).”