Greece with­out il­lu­sions

Financial Mirror (Cyprus) - - FRONT PAGE -

“The costli­est mi­nor gov­ern­ment reshuf­fle in Greece’s history.” That is at least one way to de­scribe the re­sult of the Greek gen­eral elec­tion on Septem­ber 20. In­deed, with few ex­cep­tions, the same min­is­ters have re­turned to the same of­fices as part of an ad­min­is­tra­tion backed by the same odd pair of par­ties (the left-wing Syriza and the smaller rightwing In­de­pen­dent Greeks), which re­ceived only a slightly lower share of the vote than the pre­vi­ous ad­min­is­tra­tion.

But the ap­pear­ance of con­ti­nu­ity is mis­lead­ing. While the per­cent­age of vot­ers back­ing the gov­ern­ment is rel­a­tively un­changed, 0.6 mln of the 6.1 mln Greeks who voted in the July 5 ref­er­en­dum on con­tin­ued “ex­tend-and-pre­tend” loans with strin­gent aus­ter­ity strings at­tached did not turn out. The loss of so many vot­ers in lit­tle more than two months re­flects the elec­torate’s dra­matic change in mood – from pas­sion­ate to glum.

The shift re­flects the man­date that Prime Min­is­ter Alexis Tsipras sought and gained. Last Jan­uary, when I stood with him, we asked vot­ers to back our de­ter­mi­na­tion to end the “ex­tend-and-pre­tend” bailouts that had pushed Greece into a black hole and op­er­ated as the tem­plate for aus­ter­ity poli­cies across Europe. The gov­ern­ment that was re­turned on Septem­ber 20 has the op­po­site man­date: to im­ple­ment an “ex­tend-and-pre­tend” bailout pro­gramme – in­deed, the most toxic vari­ant ever.

The new Tsipras ad­min­is­tra­tion knows this. Tsipras un­der­stands that his gov­ern­ment is skat­ing on the thin ice of a fis­cal pro­gramme that can­not suc­ceed and a re­form agenda that his min­is­ters loathe. While vot­ers wisely pre­fer that he and his cab­i­net, rather than the con­ser­va­tive op­po­si­tion, im­ple­ment a pro­gramme that an over­whelm­ing ma­jor­ity of Greeks de­test, the re­al­ity of the aus­ter­ity agenda will test public pa­tience.

The Tsipras gov­ern­ment is com­mit­ted to en­act­ing a long list of re­ces­sion­ary mea­sures. Three high­light the tax avalanche that awaits: More than 600,000 farm­ers will be asked to pay ad­di­tional back taxes for 2014 and to pre-pay over 50% of next year’s es­ti­mated tax. Some 700,000 small busi­nesses (in­clud­ing low-wage work­ers who are forced to op­er­ate as pri­vate ser­vice providers) will have to pre-pay 100% (yes, you read that right) of next year’s taxes. As of next year, ev­ery mer­chant will face a 26% turnover tax from the first euro they earn – while be­ing re­quired to pre-pay in 2016 a full 75% of their 2017 taxes.

In ad­di­tion to these lu­di­crous tax hikes (which also in­clude sub­stan­tial in­creases in sales taxes), the Tsipras gov­ern­ment has agreed to pen­sion cut­backs and fire sales of public as­sets. Even most re­form-minded Greeks balk at the agenda im­posed by the “troika” (the Euro­pean Com­mis­sion, the In­ter­na­tional Mon­e­tary Fund, and the Euro­pean Cen­tral Bank).

Tsipras is at­tempt­ing to erect two lines of de­fense against the com­ing tsunami of pain (and thereby min­imise pop­u­lar dis­con­tent). The first line is to press the troika to make good on its prom­ise to en­ter into debt-re­lief ne­go­ti­a­tions once its re­ces­sion­ary agenda has been fully im­ple­mented. The sec­ond line of de­fense is based on the prom­ise of a “par­al­lel” agenda aimed at ame­lio­rat­ing the worst ef­fects of the troika pro­gram. But both lines are por­ous, at best, given the harsh re­al­i­ties of Greece’s eco­nomic cir­cum­stances.

There is lit­tle doubt that the Greek gov­ern­ment will gain some debt re­lief. An un­payable debt is, one way or another, a hair­cut. But Greece’s cred­i­tors have al­ready had two hair­cuts, first in the spring of 2012, and another that De­cem­ber. Alas, those hair­cuts, while sub­stan­tial, were too lit­tle, too late, and too toxic in terms of their fi­nan­cial and le­gal pa­ram­e­ters.

The ques­tion fac­ing the Tsipras gov­ern­ment is thus whether the next hair­cut will be more ther­a­peu­tic than the last. To help the Greek econ­omy heal, debt re­lief must be both size­able and a lever for elim­i­nat­ing most of the new aus­ter­ity mea­sures, which merely guar­an­tee another spin of the debt-de­fla­tion cy­cle. More pre­cisely, debt re­duc­tion must be ac­com­pa­nied by a re­duc­tion in the tar­get for the medi­umterm pri­mary bud­get sur­plus, from the cur­rent 3.5% of GDP to no more than 1.5%. Noth­ing econ­omy to re­cover.

Is any­thing like this po­lit­i­cally pos­si­ble? One clue re­cently emerged in an ar­ti­cle in the in which Klaus Regling, the head of Europe’s bailout fund, the Euro­pean Sta­bil­ity Mech­a­nism, re­turned to the troika’s mantra that Greece does not need sub­stan­tial debt re­lief. Regling may not be a ma­jor player in his own right, but he never speaks out of turn or con­tra­dicts the ECB and the Ger­man gov­ern­ment.

Of course, there is the IMF, whose staff tell any­one will­ing to lis­ten that Greek debt must be cut by ap­prox­i­mately onethird, or EUR 100 bln. But if the re­cent past is any guide to the near fu­ture, the IMF’s views will be trumped.

This leaves Tsipras with only his sec­ond line of de­fense: the “par­al­lel” pro­gramme. The idea here is to demon­strate to the elec­torate that the gov­ern­ment can com­bine ca­pit­u­la­tion to the troika with its own agenda of re­forms, com­pris­ing ef­fi­ciency gains and an as­sault on the oli­garchy that may lib­er­ate funds for the pur­pose of less­en­ing aus­ter­ity’s im­pact on weaker Greeks.

This is a wor­thy pro­ject. If the gov­ern­ment can pull it off, it is a po­ten­tial game changer.

To suc­ceed, how­ever, the gov­ern­ment will have to slay two dragons at once: The in­com­pe­tence of Greece’s public ad­min­is­tra­tion and the in­ex­haustible re­source­ful­ness of an oli­garchy that knows how to de­fend it­self – in­clud­ing by forg­ing strong al­liances with the troika.

else can al­low the Greek

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