New pol­icy mix needed, as the more a so­lu­tion is de­layed the worse it will be

Dead­line ex­ten­sion and ad­di­tional fund­ing from Europe are es­sen­tial to make ends meet

Kathimerini English - - Business & Finance - BY DIM­ITRIS KONTOGIANNIS

AGreece, the Euro­pean Union and the In­ter­na­tional Mon­e­tary Fund are wast­ing pre­cious time by not rec­og­niz­ing that kick­ing the can down the road does not lead any­where but more painful so­lu­tions for the peo­ple in this coun­try.

The strat­egy of post­pon­ing im­por­tant de­ci­sions in hope of gain­ing time so that things get bet­ter later on does not ap­par­ently work.

As a mat­ter of fact, the de­lay has made things worse. Greece needs to fine-tune the fis­cal strat­egy by tak­ing into con­sid­er­a­tion the eco­nomic re­ces­sion and ad­her­ing to struc­tural re­forms.

By all ac­counts, the gov­ern­ment has failed to live up to some of the obli­ga­tions as­sumed un­der the eco­nomic pol­icy pro­gram – known as the mem­o­ran­dum – it signed last May in ex­change for a bailout loan of 110 bil­lion eu­ros.

Ac­cord­ing to high-level EU of­fi­cials, the gov­ern­ment is long on prom­ises and short on de­liv­er­ing when the time for a re­view comes af­ter a strong start last sum­mer.

Some cabi­net mem­bers have tried to wa­ter down leg­is­la­tion in­tro­duc­ing struc­tural re­forms and in some cases for­get to sign the min­is­te­rial de­crees to im­ple­ment the agreed-upon re­forms.

These tac­tics have in­fu­ri­ated some EU of­fi­cials abroad but ev­ery­body knows that struc­tural changes will bear fruit in the medium to long term.

Al­though these re­forms are very im­por­tant for the econ­omy, the key to form­ing mar­ket ex­pec­ta­tions and sen­ti­ment in the short run has been the re­duc­tion of the bud­get deficit ac­cord­ing to plan.

The fact that last year’s bud­get deficit was re­vised up­ward to 10.5 per­cent of gross do­mes­tic prod­uct com­pared to an es­ti­mated 7.9 per­cent when the 2011 draft bud­get came out last Octo- ber did lit­tle to con­vince the mar­kets that Greece has im­ple­mented a strong pol­icy pack­age de­signed to re­duce its huge pub­lic debt over time.

It is no co­in­ci­dence that the mar­kets had taken the 10-year bond yield over Ger­many be­low 700 ba­sis points at the time com­pared to more than 1,200 points to­day.

Of course, as we have ar­gued be­fore, the EU is partly to be blamed for the re-widen­ing of Greek spreads be­cause of the im­plicit con­di­tion of a debt re­struc­tur­ing for coun­tries en­ter­ing the ESM (Euro­pean Sta­bil­ity Mech­a­nism) from mid-2013.

Ac­cord­ing to the orig­i­nal plan, Greece’s pub­lic fund­ing needs are sup­posed to be fully cov­ered till March-April 2012, pro­vided the coun­try broadly ad­heres to the gen­eral gov­ern­ment deficit re­duc­tion tar­get of about 7 bil­lion eu­ros this year, tak­ing the gap down to about 17 bil­lion from around 24 bil­lion in 2010.

It is ap­par­ently ev­i­dent to the Greek of­fi­cials, the team of in­ter­na­tional len­ders known as the troika and oth­ers that meet­ing this tar­get would be ex­tremely dif­fi­cult this year as the econ­omy has nose­dived, in­creas­ing the like­li­hood of so­cial un­rest if more aus­ter­ity mea­sures are im­ple­mented.

This means the coun­try may need ex­tra fund­ing ear­lier than April 2012, that is, an­other loan in 2011. We be­lieve the ur­gency of the high-level talks in Lux­em­bourg last Fri­day in the pres­ence of the Greek fi­nance min­is­ter re­flect this re­al­ity.

Whether the EU can pro­vide new fund­ing from the tem­po­rary mech­a­nism EFSF (the Euro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity), over­com­ing po­lit­i­cal ob­jec­tions else­where with or with­out Greece pro­ceed­ing with a vol­un­tary re­struc­tur­ing in the form of a ma­tu­rity ex­ten­sion of its debt ex­pir­ing in 2012 or/and 2013 in the com­ing months re­mains to be seen.

Greece has reached this sit­u­a­tion be­cause of a poor mix of in­ad­e­quate pri­mary spend­ing cuts and heavy tax hikes to re­duce the bud­get deficit in the first place, with the troika’s bless­ing.

Per­haps, its is not a co­in­ci­dence that a banker who a few months ago pointed out to the troika the need for clos­ing down state cor- po­ra­tions and lay­ing off re­dun­dant per­son­nel at state en­ti­ties was re­buffed with the ar­gu­ment that this would have made the re­ces­sion worse and per­haps caused so­cial un­rest.

A few months later, more than 200,000 em­ploy­ees in the pri­vate sec­tor have been fired and the re­ces­sion seems to have deep­ened, un­der­min­ing the coun­try’s hopes of re­turn­ing to in­ter­na­tional mar­kets.

It is very un­for­tu­nate that the pro­gram has to be im­ple­mented un­der these cir­cum­stances.

Still, the best course of ac­tion is to change the fis­cal pol­icy mix by let­ting Greece slip on meet­ing its tax rev­enue tar­get and re­fo­cus­ing the ef­forts on more spend­ing cuts while fa­cil­i­tat­ing the fund­ing of this year’s en­su­ing gap one way or an­other, that is, EFSF fund­ing or/and a vol­un­tary ma­tu­rity ex­ten­sion of the debt.

It seems sen­si­ble to let Greece try to se­cure the vol­un­tary par­tic­i­pa­tion of a good num­ber of its bond­hold­ers to roll over the bond ma­tu­ri­ties ex­pir­ing in 2012 and be­yond and cover the rest with EFSF fund­ing if a Brady-type bond so­lu­tion is ruled out.

In other words, the Greek gov­ern­ment should be held re­spon­si­ble for im­ple­ment­ing all struc­tural eco­nomic mea­sures agreed to but the coun­try should be given some breath­ing room in terms of miss­ing the deficit tar­get to the ex­tent that is jus­ti­fied by the eco­nomic re­ces­sion.

This way, Greece will not have kicked the can down the road and the troika will have tried to cor­rect its early mis­take of putting more weight than needed on tax rev­enue gen­er­at­ing mea­sures to se­cure the deficit re­duc­tion which has brought a good deal of the pri­vate sec­tor to its knees and has left the huge and un­pro­duc­tive pub­lic sec­tor vir­tu­ally un­scathed.

In this re­gard, the 2012-15 macroe­co­nomic pro­gram bud­get deficit tar­gets should not be aban­doned.

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