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Greece's new prime minister faces a difficult battle with creditors

Key Points
  • Mitstotakis, who was sworn in on Monday, told CNBC: "I've received an outright majority … that means there is a real, strong mandate for change in Greece, and this what I have promised to deliver, and this is what I will do."
  • Mitsotakis has a clear plan but some of Greece's creditors have already made it clear that "it is hard to see" how the fiscal targets could be changed.
Greece's Prime minister Kyriakos Mitsotakis attends the swearing-in ceremony of the newly appointed government at the presidential palace in Athens, on July 9, 2019.
LOUISA GOULIAMAKI | AFP | Getty Images

Greece's new prime minister is gearing up for sensitive discussions with international creditors – a battle that could define his premiership and the way Europe deals with bailed out countries.

Greece agreed to some tough fiscal targets last year in exchange for some debt softening measures from its creditors. For instance, the three-time bailed out economy has to deliver a primary budget surplus – this is when a government has higher revenues compared to its spending – of 3.5% until 2022. Achieving such high level of primary surplus limits the government's ability to spend.

Kyriakos Mitstotakis, who was sworn in on Monday, told CNBC in Athens: "I've received an outright majority … that means there is a real, strong mandate for change in Greece, and this what I have promised to deliver, and this is what I will do."

He had told CNBC back in February that Greece had gone "overboard with austerity" and one of his priorities as prime minister would be to change some of the fiscal targets, including the primary budget surplus.

We must keep at all moment(s) in time our commitments
Mario Centeno
Eurogroup President

Greece started showing some signs of financial turmoil back in 2009. Different governments had overspent and the country's debt pile increased. Investors ended up losing their confidence on Greece and its ability to repay all of its debt.

Athens requested a bailout from international creditors (European countries and the International Monetary Fund) in 2010 – which, after dramatic negotiations and events, was followed by two other bailout programs. Greece only cut the cord from creditors last August. Its public debt stands at above 170% of GDP (growth domestic product) – one of the highest worldwide.

Europe sceptical about changing fiscal targets

Mitsotakis has a clear plan but some of Greece's creditors have already made it clear that "it is hard to see" how the fiscal targets could be changed.

"This is a cornerstone of the program since the beginning," Klaus Regling, managing director of euro area's bailout fund ESM, told journalists on Monday evening about the 3.5% threshold.

"It is the precondition for additional debt relief measures and it is very hard to see how debt sustainability can be achieved without that," he added.

Under the agreement that Greece achieved with its creditors, Athens delivers on its fiscal targets and is allowed to make later repayments and/or at more favourable rates. If Greece does not achieve the required primary budget surplus level, the relief measures are not immediately applied.

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Regling recalled during the press conference in Brussels that Greece owes more than 200 billion euros ($224.1 billion) to the euro area bailout fund.

Mario Centeno, head of the group that brings together the 19 finance ministers of the euro zone, also said Monday: "We must keep at all moment(s) in time our commitments."

"This is the only way I know to gain credibility," he said.

Pierre Moscovici, European commissioner for economic affairs and who was heavily involved in the progress of the Greek bailout, told CNBC that Europe needs to examine the new situation.

"There were talks/promises during the campaign… but we'll discuss in time and on very precise requests (the Greek situation)," Moscovici told CNBC's Willem Marx.

Mitsotakis has a government plan that is pro-business. He wants to implement wide tax reform, including to bring down the corporate tax rate to 20% in the next two years and to double the country's growth rate. Greece's new prime minister is hosting his first cabinet meeting Wednesday morning in Athens.