The New Greek Bailout: A Trojan horse or a blessing in disguise?

Posted on the 30th July 2015 by Aakanksha, Communications Coordinator


Officials representing the EU, ECB, ESM and IMF began their inspection of the Greek State with a visit to the State General Accounting Office on Tuesday this week.

On July 23rd , Greek Prime Minister Alexis Tsipras quenched rebellion amongst his party to get parliamentary approval for what is to be Greece’s third bailout deal.

The antagonism against the leftist Syriza party has increased as the Prime Minister has conceded to several of the conditions that he proclaimed as his party’s mandate during elections. Perhaps a point of comfort is that the rebellion in passing the second lot of reforms has been lower than in the first round.

The ex-finance minister Yanis Varoufakis, who has come under the spotlight yet again due to his controversial statements regarding the success of the proposed and the more recent revelation of a drastic “Plan B” which involved contingency plans in case the Grexit came about, also voted with the Greek government.

First, lets look at the allocation of the €86 billion euros that Greece is to receive.

  1. €50bn is to form a trust fund through the privatisation of Greek government assets. This is sub-allocated as follows:

    *€25bn to repay recapitalisation loan for banks

    *€12.5 to reduce debt-GDP ratio

    *€12.5 for investment purposes

  2. €12bn is to form a bridging loan to repay the ECB debt by mid August

  3. €35bn in the form of EU funding for growth and new jobs

But in order to receive the urgent €7.2bn bridging loan for Greece to meet its ECB repayment deadline, the Greek government has had to pass a set of tough economic reforms. After Machiavellian moves by the Prime Minister, a threat of resignation, a referendum and much debate, the economic reforms passed by the Greek Parliament consider the following:

  1. Increase in overall taxes and a restructure of fiscal legislation with a view to increase fiscal revenues.

  2. Increase VAT to generate a revenue gain of 1% of GDP.

  3. Pension reforms, which aim to increase the retirement age to 67 by 2022.

  4. Legislation with regards to public administration, justice, anti-corruption and an overhaul of the Greek civil code to make legal processing faster

  5. Financial sector regulation including implementation of EU directives guaranteeing bank deposits up to €100,000 to shift weight in case of default from tax- payers to creditors and shareholders.

The key question to be answered, however, is whether the new deal will prove to be a Trojan horse in terms of political guidance from the bigger Eurozone powers or a blessing in the disguise of despised austerity, which will help Greek economy stand on its feet again.

WES Looking Forward

The Greek crisis can be considered from various angles and as always, we encourage you to explore on your own in innovative ways. We present to you some of the angles to consider:

1. Game theory and Negotiations: Leaving the Euro would be catastrophic for the Greek government as the currency collapses and all payments from the IMF and ECB are frozen. Equally, however, the ‘Grexit’ would be disastrous for the Eurozone politically and economically as it would prove their inability to maintain a secure, financially stable political area due to the inevitable conflict of fiscal measures and political governance. Also, the reputational effects would be tremendous. Is the bailout temporary relief or are we in a situation of Grim Trigger?

We must also consider the game theory that can be applied internally. In order to solve the infamous problem of bank runs that every economics student has encountered at some point, the Greek government applied capital controls while the banks shut down. These capital controls limited the maximum withdrawal at €60 a day, eventually allowing the limit to be accumulated. Needless to say, small businesses were not happy as transactions and payments to vendors, staff etc. came to a standstill.

2. The Paradox of Aggregates: In what was described appropriately as ‘a big game of moutzouris’1 in an interview given by a Greek businessman to the FT, half of private tax filings were completed by July 10th, well ahead of the deadline- 27th July. It appeared as though no one wished to hold money or keep deposits in their accounts for fear of a bail in. People wished to make payments upfront and also switched to purchasing electronics and other items of long-term value.

3. Public Policy Economics: The leftist Syriza party came to power on the basis of anti-austerity promises. As the government lets down the public that voted against the first set of reforms, as well as its own party, it loses credibility, which brings us to the revised expectations formed by the public. Will the public punish the government in the form of revised expectations and can it do so in this situation are interesting questions to consider.

4. The Political Economy: How far can the public policy of a country be dictated by political powers outside the country? Increasing the VAT to 23% in order to generate a revenue increase of 1% of GDP was one of the reforms agreed to. Shouldn’t such decisions be made internally? Did the members of the Eurozone unwittingly handover political governance power to the EU when deciding to share a currency?

1Moutzouris, as per the FT article is described as “a traditional children’s card game where the loser is the player stuck holding the cards, and his face is then daubed with paint.”

By Aakanksha Jaiswal, Communications Coordinator, WES 2016

Resources: Discover charts and the reflection of the economic decisions on the government bond yields

Read an interesting commentary on the reforms and find the detailed document


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