The Greek crisis erupted in 2009 and peaked for the first time in the spring of 2010. Unable to refinance its enormous debt, Greece was bailed out by the European Commission, the European Central Bank, and the IMF. The bailout  prevented a major economic catastrophe but signaled the start of a protracted economic and political drama that spread to the rest of the eurozone. In Greece, the crisis peaked twice more: in the summer of 2012, when two successive elections left Greece’s political system in shambles, and in the summer of 2015, when Greece’s newly elected left-wing government unsuccessfully threatened its European creditors and the IMF with a massive default in a failed attempt to win some debt relief and a break from austerity policies.

At each inflection point, commentators wrung their hands over the potential contagion from a catastrophic Greek default and subsequent exit from the eurozone. The near collapse of June-July 2015 was perhaps the most dramatic, peaking with a bank shut-down and bizarre referendum in which the embattled Greek prime minister and anti-austerity champion, Alexis Tsipras, urged Greeks to reject a bailout package that he had just negotiated with Greece’s Troika of creditors.

In the end, the doomsayers were wrong all three times. Grexit did not happen and the euro survived. As for the July 2015 showdown, its resolution was decidedly anti-climactic. Greeks voted “no” in the referendum, but faced with the prospect of complete economic collapse, Tsipras executed an undignified U-turn, settling for an 85 billion euro ($96 billion) bailout, the country’s third since 2010.  A new round of elections was called in September 2015. Tsipras won again, but with the exact opposite mandate of the one that he had before: instead of abolishing austerity, he now promised to implement it. The weeks wore on and, as before, Greece retreated from the global headlines.

Yet if the past is a guide, the lull may well prove to be temporary. In fact, a new round of turmoil—a fourth and perhaps final peak—is in the offing.

Protesters hold a banner depicting a mock Euro banknote during a demonstration marking a 24-hour strike of the country's biggest public sector union ADEDY against planned tax and pension reforms in Athens, Greece, April 7, 2016.
Protesters hold a banner depicting a mock Euro banknote during a demonstration marking a 24-hour strike of the country's biggest public sector union ADEDY against planned tax and pension reforms in Athens, Greece, April 7, 2016.
Alkis Konstantinidis / Reuters

Like the previous bailouts, the July 2015 package came with strict conditions, including that Greece continue austerity and undertake far-reaching structural reforms. Greece’s Troika of creditors, now turned into a Quartet with the addition of the European Stability Mechanism (ESM), aims to stabilize the Greek economy so that it can return to the financial markets. It set two reviews to assess Greece’s progress on the implementation of the agreement. Given enough headway, Greece will be able to access the remaining bailout funds, which it desperately needs to remain afloat. The Quartet also agreed to open negotiations on Greek debt relief.

The first review was scheduled to be finished by November 2015, but it has yet to be completed. There are two main reasons for this delay.

The first is that the Greek government has dragged its feet. It has prioritized counterproductive fiscal measures that have produced lower revenues than anticipated and has been very slow to implement key measures, such as public administration reform and privatizations. No action has been taken on very sensitive items such as pension reform and non-performing loans. What is more, Tsipras has gone on record saying that he does not believe in the policies that he agreed to implement. His popularity, though, is rapidly dwindling as he has failed to live up to his promises to improve the economy. Quite the contrary: under his watch, the country went back into recession. No growth is forecast for this year either.

It didn’t have to be this way. Back in 2014, Greece had managed to achieve a modest economic recovery. It had recapitalized its fledging banking sector, attracted several foreign investors, returned to growth after years of recession, and had successfully tapped financial markets. The economy was projected to grow by three percent in 2015. But Greece’s botched negotiation in the summer of 2015 brought back the Grexit specter, causing a deposit flight in excess of more 36 billion euros that gutted the banks and pushed the country back into recession—albeit a less severe one than originally feared (a mere 0.3 percent compared to projections of 2.7 percent). Yet the damage was much deeper than this number suggests. The introduction of capital controls led to the flight of thousands of Greek business abroad, pushed Greece out of international financial markets, and kept it out of the European Central Bank’s Quantitative Easing program—the only eurozone member left out.

The opposition New Democracy party has blamed this new round of austerity on Tsipras’ botched negotiations with Greece’s creditors. It is growing stronger under a new leader, Kyriakos Mitsotakis. In an effort to recapture the lost ground, Tsipras has been forced to escalate his rhetoric, especially against the IMF.  However, he is fast running out of ammunition.

The second reason for the delay is related to internal disagreements within the creditor camp—the IMF on one side and the Europeans on the other. The IMF considers Greek debt to be unsustainable and has called for generous debt relief. It has also made the case for less punishing and more realistic fiscal targets. Under the terms of the bailout, Greece is supposed to pass measures to create a primary budget surplus of 3.5 percent of economic output by 2018, which the IMF does not consider realistic. Yet any discussion of debt relief is a lightning rod for Germany and most eurozone states.

Greece’s European creditors could opt to go it alone without the IMF. However, they have insisted on keeping the IMF in the process, as a credible “bad cop” for Greece’s reluctant government. Indeed, the IMF is seen as less amenable to the kind of lenient implementation that often characterizes EU policymaking. It is common knowledge, for instance, that the German Bundestag would refuse to release any further financial assistance to Greece if the IMF is not included in the program.

To make things even more complicated (or absurd), the Greek government has lashed out against the IMF, despite the IMF’s more generous policy positions. Simply put, Athens prefers the potentially lax enforcement of stringent European austerity targets over the strict enforcement of more lenient IMF targets. Indeed, Athens tried to take advantage of a leaked phone conversation between two top IMF officials, in which they discussed how to get German Chancellor Angela Merkel to either ease Greece’s debt burden or lose the IMF’s participation in its bailout. However, if the plan was to divide and conquer Greece’s creditors, it quickly proved to be yet another miscalculation on the part of the Tsipras’ government. The leaked call ended up bringing the creditors’ positions closer together.

A stock ticker shows stock options making losses at the lobby of the Athens stock exchange building in Athens, Greece, February 8, 2016.
A stock ticker shows stock options making losses at the lobby of the Athens stock exchange building in Athens, Greece, February 8, 2016.
Alkis Konstantinidis / Reuters

The negotiations between Greece and the Quartet have been complex, opaque, and slow. Three issues in particular dominate the current round: taxes, pensions, and non-performing loans.

Despite several reforms, the Greek tax system remains murky and inefficient. Athens insists on maintaining a very broad tax exemption that effectively frees 55 percent of all households from the obligation to file personal income taxes. Greece’s exemption threshold is currently higher than in Germany and elsewhere in the eurozone, a sore point for creditor countries—but something the Greek government has been loathe to address.

The cost of funding Greek pensions, meanwhile, is one of the key factors that contributed to Greece’s skyrocketing public debt. By design, the Greek state is a significant contributor to pensions. A very substantial part of the Greek budget (over 15 percent according to some calculations) is dedicated to it. Greece’s recession has aggravated the matter by reducing the size of worker contributions through the rise of unemployment, successive wage reductions, and the inflation of the ranks pensioners via public sector worker attrition. As a result, Greece now has only 1.7 workers for every one pensioner. Add to this a rapidly aging population, the result of a record low birthrate that predates the crisis, and you have a very tough problem to crack. The creditors are pushing for radical reforms through both pension reductions and the rationalization of the entire system. In its bid to minimize political cost, the Greek side proposes instead hikes in employer and employee contributions that are unlikely to lead to a sustainable system and would only postpone the day of reckoning.

Lastly, the accumulation of bad debt by businesses and households has all but destroyed the ability of Greek banks to finance investment. Such debt is currently estimated to have reached 108 billion euros ($121 billion) for banks whose deposits amount to just 123 billion euros ($138 billion). Clearly, any further economic deterioration could be fatal for the banks. According to some observers, between 20 and 40 percent of the bad loans are held by so-called strategic defaulters who have the ability to pay but are exploiting the current political paralysis to avoid doing so. So far, Greece has done nothing to address this explosive problem.

The Greek government hopes to preserve its rapidly dwindling political capital by resisting creditor demands, but the latter are not budging. As a result, Greece is getting the worst possible deal: undergoing the pain of endless austerity without the potential upswing of reforming its economy and completing the program.


The delay of the review has hurt the Greek economy. A recent report from the Foundation for Economic and Industrial Research, a major Athens-based think tank, forecasts that Greece’s economy will shrink by one percent this year as the uncertainty continues. Banks have been recapitalized (for the fourth time since 2009!), but their value has already evaporated: their shares have plunged as uncertainty over the stalled bailout review has weighed on the country's prospects.

Add to this lethal economic cocktail the Greek state’s limited capacity to implement effective policy reform, its inefficient judiciary, and the government’s ideological dislike of free markets. The result is an unattractive environment for badly needed investment. Indeed, many funds that invested in Greece between 2010 and 2015 got badly burned and a major investor exodus led to big losses in the Athens Stock Exchange. Representatives of the funds that stayed put—despite suffering losses of more than 55 percent on their investments—met with the Greek prime minister in late January and stressed the need for a timely completion of the review. Tsipras assured investors of the government's determination and told them that it would be completed by the end of March. It wasn’t.

And now things could get worse. The review could drag into the summer, and in June and July, Greece faces more than ten billion euros ($11.3 billion) of debt repayments, money it will not have unless it completes this review. Indeed, a key point in the leaked IMF conversations was that Greece would only back down if faced with a liquidity crunch.

There are some signs that the review could be completed in May. In particular, the coming British referendum on EU membership in June motivates the European Union to work hard and prevent yet another Greek crisis.  Nevertheless, even if the review is done by May, turmoil might not be avoided. The Greek government has a very thin parliamentary majority (it currently controls 153 out of 300 members of parliament). Just a few defections would be enough to bring it down and usher in a political crisis. Tsipras may even choose to reactivate his anti-austerity credentials by launching a campaign against the country’s creditors, although such a move might lack credibility in view of his recent capitulation. More broadly, the continuing lackluster performance of the Greek economy is reinforcing the feelings of austerity and bailout fatigue among creditors and debtors alike. Under such conditions it is not impossible to imagine a scenario where Grexit might emerge as a possible way out of this conundrum.

To avoid this prospect, the Greek economy must return to growth. This requires that both sides take a hard look at their past mistakes. Creditors must prioritize reforms and debt relief over fiscal measures and Greece must take full ownership of the program rather than fighting a self-defeating war of attrition.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now
  • STATHIS N. KALYVAS is Arnold Wolfers Professor of Political Science and Director of the Program on Order, Conflict, and Violence at Yale University.
  • More By Stathis N. Kalyvas