Greek debt crisis: background and developments in 2015

After months of fruitless negotiations, Greece’s future in the Eurozone was saved after a last-minute three-year loans-for-reforms agreement was reached in July 2015.

At a 12 July 2015 meeting of Eurozone leaders, a provisional agreement was struck on a third Eurozone bailout programme which could provide up to €86 billion in loans for Greece over three years. These all-night talks were at times fractious and reportedly came close to ending without agreement (and likely Greek departure from the Eurozone).

Formal negotiations – the “Memorandum of Understanding” – on the detail of the programme were concluded in mid-August. It requires Greece to implement reforms including changes to pensions and market-based reforms of the economy designed to make it more competitive. The first loan payment to Greece of €23 billion (including €10 billion reserved for bank recapitalisations) was made on 20 August. Greek Prime Minister Alexis Tsipras called a September election, after his Syriza party had become divided over the new bailout deal. Syriza won the election, with Alexis Tsipras back as Prime Minister.

Prior to this new three-year deal, negotiations on the final instalment of funds (of €7.2 billion) as part of the second bailout programme ended in failure in late June. The Greek government called a referendum on proposals from its creditors – the Eurozone, International Monetary Fund and European Central Bank – for this money. The electorate rejected the terms, backing the government’s position (a week later the new three-year agreement was reached).

Other Eurozone countries viewed the decision to hold a referendum as tantamount to Greece breaking off negotiations. As a result, the second Eurozone bailout programme, and the funds earmarked from this, expired on 30 June. This exacerbated Greece’s funding problems and led to it defaulting on a €1.5 billion debt repayment to the IMF at the end of June (since paid).

The European Central Bank also froze its emergency funding of Greece’s banks, leading to Greece having to introduce capital controls to stop money leaving the banking system. Foreign transactions were also severely limited and banks were shut (for three weeks). All this has had serious negative effects on the economy, which has likely fallen into recession again.

The newly-agreed €86 billion Eurozone bailout programme reduces the short-term likelihood of Greece leaving the Eurozone. Nevertheless, many think that over the medium-term ‘Grexit’ is still possible. Most economists expect the impact from this on the UK would come via financial markets and through the impact on the Eurozone economy.

Greece’s economy has undergone a severe recession since the debt crisis began, with the economy over a quarter smaller now than it was then. Two international bailout programmes in 2010 and 2012 have provided a total of around €216 billion (£154 billion) in financial aid to Greece. Attached to these loans have been stringent conditions designed to reduce the budget deficit and improve economic competitiveness.