By: Dr. Mike Campbell

There is no doubt that the motivation of the EU and IMF when granting Greece its first bailout package was to help it avoid the risk of default on its existing financial obligations. Terms and conditions were set for the granting of the €110 billion bailout package and the loan attracted a significant level of interest (between 3 and 5%). The loan must, of course, be repaid eventually.

However, the Eurozone member states may well have felt cheated by the Greeks since the previous Greek government had “fudged” the figures (to put it mildly) such that the country would appear to meet the convergence conditions for joining the Euro. With a different government in power and the global financial crisis in full swing, the true situation about the Greek debt and the budget deficit emerged. The convergence criteria required that Greece’s deficit was that it should be maintained at no more than 3% of GDP – in fact, it stood 13.6% in 2009; and the public sector debt was at least 115% of GDP – the convergence criteria was a maximum of 60%.

The EU/IMF bailout is being paid in tranches and Greece must make progress against the conditions in order for each instalment to be released – the idea of this is that it would put the Greek financial house in order. However, the Greeks have just said that they are going to miss this year’s deficit cutting target.

This situation leaves the EU in a big quandary; do they refuse the next tranche and precipitate a Greek default, or do they soften the terms? After all, the Greek authorities are doing their best to reduce the deficit as the austerity protests against measure they have approved demonstrate. In the interim, the EU has delayed the decision on the next tranche of funding.

What is needed is for the European and wider political authorities to state that they will support Greece in its efforts to reform and will under-write its debts. In the longer term, Greek credibility relies on the Greeks resolving their own problems: right now, they need a little help from their friends.