Is Greece's eurozone future finally safe?

Athens has got its Troika bailout cash and seen its credit rating upgraded. So can Greece now breathe a little easier? Not so fast, says Ben Chu

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The Independent Online

Greece has been waiting for years for a positive headline. And then, like a flurry of snow, several arrive at once. The latest €50bn (£40bn) tranche of bailout money that Athens needs to pay public sector salaries and recapitalise its bust banks has been released by the Troika. The credit rating agency Standard & Poor's this week upgraded Greek debt from "selective default" to "B-" after Athens managed to buy back €32bn of its own debt at a discount on the face value. That buyback reportedly earned an American hedge fund, Third Point, which bet against Athens being forced out of the eurozone, a tidy $500m profit.

The European Central Bank is also accepting Greek bonds as collateral again, which should ease the pressures on the domestic financial sector. And that was all topped off yesterday with an announcement by the budget airline Ryanair that it intends to open a base at Chania in Crete.

So is Greece finally safe in the eurozone? Is "Grexit dead", as the coalition Prime Minister, Antonis Samaras, declared last week?

Unfortunately, it would be grossly premature to reach such a conclusion. The Greek economy has shrunk by a quarter since its bubble burst in 2008, pushing unemployment to 25 per cent and youth joblessness to 57 per cent. Under the IMF's latest forecasts the economy will contract by a further 4 per cent in 2013, and finally start growing again in 2014. Thanks to the deal hammered out last month between European member states and the International Monetary Fund – which approved the bond buyback and extended the maturities on some official Greek loans – Greek debt is now projected to peak at 175 per cent of GDP in 2016 and fall to 124 per cent by 2020.

Yet the IMF has been repeatedly and spectacularly over-optimistic about Greece's growth prospects as the chart (right), compiled by Zsolt Darvas of the Bruegel think-tank, shows. Downward revision has followed downward revision. The same thing has happened, as the other Bruegel chart shows, to the IMF's employment projections for Greece.

Despite years of cuts, Athens' budget deficit in 2012 is still projected to be a dangerously high 7.5 per cent of GDP. Many more spending cuts and tax rises are still in the pipeline. The IMF admitted earlier this year that its economists underestimated the broader economic impact of spending cuts implemented so far. It also underestimated the impact of the wider eurozone contraction. Greece is being forced to undergo an agonising internal devaluation in order to increase its exports to a eurozone that is itself contracting. Ryanair's new base in Crete might help to boost tourism revenues, but the route would be much busier if Greece wasn't wearing the single currency straitjacket and operators could advertise ultra-cheap holidays.

If the IMF forecasters have got it wrong again on growth Athens will soon run into trouble. Further disappointments would throw that 2020 debt/GDP target off course, as borrowing stays high and unemployment fails to fall. Another downgrade would compel the IMF (whose own rules say it can only lend to solvent states) to demand more action to bring down Athens' borrowing burden.

Buybacks and loan term extensions would probably not be enough next time around. The IMF would likely pressure Greece's official creditors – other eurozone member states – to write off a large chunk of their loans to Athens entirely. That will not go down at all well in Berlin, where Greek debt forgiveness remains a neuralgic issue. This is because the German Chancellor, Angela Merkel, told the German parliament, after it approved a second €172bn bailout for Athens earlier this year, that she would not come to them for more rescue money for Greece. She will be desperate not to break that promise, at least before the German general elections next September.

Yet if the Greek slump accelerates early next year, another battle between Greece's official creditors might prove unavoidable. Without an improvement in Greece's economy, the domestic pressure on Mr Samaras's coalition will also intensify, threatening his ability to deliver on his austerity promises to the Troika. Support for the anti-bailout party Syriza has grown since it narrowly came second in June's restaged general election. The fascist Golden Dawn party is attracting more support too.

Put all this together and Greece's future in the eurozone seems to hinge on official growth forecasts that have been wrong for four years finally turning out to be correct. Third Point won its short-term bet on Greece remaining in the single currency. But who would take a long-term wager? The threat of Grexit is not dead, only sleeping.