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Tsipras to face reality

Rolf Wenkel / uheJanuary 26, 2015

Following his election victory, Greece's new left-wing leader Alexis Tsipras has formed a new government with the anti-austerity Independent Greeks party. But both parties' lofty promises appear to be unrealistic.

Griechenland Wahlen 2015 Jubel bei Syriza Alexis Tsipras
Image: Reuters/A.Konstantinidis

Alexis Tsipras' left-wing Syriza alliance won a resounding victory in Sunday's parliamentary election, promising "Hope is Coming" to a population suffering from six years of economic depression.

On Monday, Tsipras was quick to forge an alliance with the nationalist, anti-austerity Independent Greeks party - a move intended to manifest his determination to lock horns with international creditors over Greece's mountain of public debt. Syriza's victory sees the eurozone's most explicitly anti-austerity government in power, and is likely to reignite fears of new financial troubles.

In his campaign, Tsipras promised to launch a social welfare program, including government support for families unable to pay rent and electricity bills. Moreover, he announced a hike in the country's minimum wage, and vowed to end home repossessions from owners who can no longer pay their mortgages.

In addition, Syriza aims to stop all privatizations - a key plank in the 240-billion euro ($269-billion) bailout agreement the debt-laden country struck in 2012 with the so-called Troika of international creditors from the EU Commission, the European Central Bank (ECB) and the international Monetary Fund (IMF).

Sobering realities

Jörg Krämer, chief economist at Germany's second-largest private lender, Commerzbank, believes that the new Greek government will have to "face reality" soon. A reality, which according to Krämer, is marked by empty state coffers, aggravated by the fact that many Greeks stopped tax payments ahead of the elections.

"According to an unofficial estimate by the Greek Finance Ministry, January tax revenue was around 1 billion euros lower than forecast in the budget," he told DW. Already, this would make it extremely difficult for Greece to repay a 4.5-billion-euro bond maturing in March, he added.

And so the specter of a Greek default is looming large again, which according to experts could see the eurozone country hovering on the brink of insolvency already this summer if it doesn't receive fresh cash from its creditors. That is because, in July, another 3.5 billion euros in Greek debt will be due, to be followed by a 3-billion euro bond in August.

Therefore, Jens Weidmann, the head of the German central bank, the Bundesbank, warned on Sunday that the new government shouldn't make "promises that the country cannot afford."

"It's already clear that Greece will require further bailout funding. Such a program will only be provided, however, if conditions are being met," he added in an interview with German public television.

As the battle lines between the new Greek government and its creditors are being drawn, the stakes are high on both sides. But Commerzbank economist Krämer thinks Tsipras is overplaying his hand and that his attempt to re-negotiate the bailout conditions is bound to fail in the coming months.

"Syriza is underestimating the fact that a Greek exit from the eurozone is no longer likely to destabilize the currency area," he told DW.

'Grexit' fallout

Nevertheless, experts believe that Greece's creditors will have to offer the new government concessions, too, in order to avoid a default. The likely exit of the country from the eurozone would cause a bank run and further turmoil in financial markets, they say. The loss of EU structural funds, which in 2014 amounted to 5 billion euros alone, would be the result.

Krämer noted that a Greek default would also be hard to sell to European electorates because EU leaders would have to explain why the bailout money was eventually lost, in contrast to what they had previously claimed. "This will come to boost the fortunes of euro-skeptic parties in Europe, notably those of the 'Alternative for Germany' (AfD) party in Germany," Krämer added.

Greece currently owes the Troika some 250 billion euros, Bilateral loans worth an estimated 53 billion euros were provided by eurozone countries, the IMF has given 35 billion euros. Moreover, the ECB has about 20 billion euros worth of Greek debt on its books.

"A compromise could include spreading repayment over a longer period, while maintaining the overall nominal amount of the debt," Krämer suggested, pointing to the possibility of lowering interest and expanding maturities for Greek debts.

Thomas Straubhaar, economist at Hamburg University, shares the view that only a compromise can solve Greece's financial problems. The austerity measures imposed on the struggling country had failed to lead the country out of economic depression, he told DW.

"Negotiations must focus on both austerity and growth. Only a joint approach to fiscal and monetary policy will achieve a lasting solution," said Straubhaar.

However, Michael Hüther, head of the Cologne Institute of Economic Research, demands driving a "tough bargain" in negotiations with Greece and other bailed-out eurozone countries. A "clear-cut policy" must be maintained, he said in a statement released Monday, regardless of whether it means "the exit of a country from the currency area."

In the statement, Hüther also called on EU leaders to "clearly define legal conditions" for a eurozone exit. "The absence of legal criteria is currently making an exit disorderly and especially harmful economically," he said.