Greece’s out­look af­ter the new troika deal

Gov­ern­ment in Athens gets more time to im­ple­ment fis­cal re­forms, re­turn to a pri­mary bal­ance and chart a course to­ward re­cov­ery

Kathimerini English - - Focus - BY JENS BAS­TIAN *

TAhe fifth fi­nan­cial tranche of loans from the coun­try’s in­ter­na­tional cred­i­tors will be paid out. An agree­ment with vis­it­ing of­fi­cials from the Euro­pean Com­mis­sion, Euro­pean Cen­tral Bank and In­ter­na­tional Mon­e­tary Fund – col­lec­tively know as the troika – has been an­nounced and then re­layed by Prime Min­is­ter Ge­orge Pa­pan­dreou to Eurogroup chief Jean-Claude Juncker in Lux­em­bourg.

The in­ter­est­ing de­tail is that Pa­pan­dreou has done it, not his fi­nance min­is­ter, as in the past. Pos­si­bly the PM is tak­ing a more as­sertive role; some­thing that many have been wait­ing for. But even if pay­ment of the tranche has been se­cured, each sub­se­quent quar­terly eval­u­a­tion is be­com­ing ever more dif­fi­cult and sub­ject to higher lev­els of risk (i.e. non­pay­ment) and con­di­tion­al­ity (e.g. re­dun­dan­cies in the pub­lic sec­tor).

The dan­ger mov­ing into the sec­ond half of 2011 and early 2012 is that at some stage one of the troika’s mem­bers is go­ing to pull the plug. If I had to put my money where my mouth is, I would think that it is the IMF that is com­ing ever closer to with­draw­ing from the fi­nanc­ing ar­range­ment.

The Wash­ing­ton-based fund has re­peat­edly warned that it could with­hold the 3-bil­lion-euro share of the fifth 12-bil­lion-euro troika tranche to be paid out next month. The IMF is seek­ing as­sur­ances that Greece is fully funded in the next 12 months and would thus not de­fault.

As has been the case so many times be­fore dur­ing the past 16 months, one of the rat­ing agen­cies has again down­graded Greece dur­ing an eval­u­a­tion by the troika. In this case it was Moody’s, which down­graded Greek sov­er­eign debt to Caa1, on a par with Cuba, and raised the coun­try’s risk of de­fault. For a sov­er­eign rat­ing to fall within less than two years from A to this (junk) sta­tus is en­tirely new ter­ri­tory, and not only in the eu­ro­zone.

How­ever, in my view, the tim­ing of the down­grade with­out await­ing the out­come of the eval­u­a­tion is a po­lit­i­cal scan­dal. In a way, the three lead­ing rat­ing agen­cies’ un­timely but de­lib­er­ate in­ter­ven­tions sug­gest that they have through the back door be­come part of the pol­i­cy­mak­ing process in Athens and be­yond. Such re­peated rat­ing ac­tion and un­prece­dented in­flu­ence must be ad­dressed in cur­rent dis­cus­sions about reg­u­la­tory re­form on rat­ing agen­cies in Europe, as is be­ing con­sid­ered by the Com­mis­sion and the EU Par­lia­ment.

Af­ter all, how sta­ble is a cur­rency union in which mem­ber states and mil­lions of cit­i­zens lit­er­ally de­pend on the as­sess­ments of three pri­vate in­sti­tu­tions who hold a mo­nop­oly over rat­ings and gov­ern­ments to ran­som?

The ne­go­ti­a­tions with the troika dur­ing the past weeks in Greece have illustrated that a rad­i­cal tax re­duc­tion pro­gram, as pro­posed by An­to­nis Sa­ma­ras, the leader of the main op­po­si­tion New Democ­racy party, has no sup­port among the gov­ern­ment, the IMF, the EU and the ECB.

Sa­ma­ras’s propo­si­tion for the in­tro­duc­tion of a “flat tax” of 15 per­cent over­looks Greece’s key struc­tural prob­lem, namely the im­prove­ment of col­lec­tion ca­pac­ity (en­force­ment) and the en­large­ment of the tax base.

Gov­ern­ment rev­enues fell in the first five months of 2011, cre­at­ing a 2.6-bil­lion-euro fis­cal hole. Specif­i­cally, rev­enues for the Jan­uary-May pe­riod fell to 17.9 bil­lion eu­ros, from 19.7 bil­lion in the same pe­riod last year. The Fi­nance Min­istry had ex­pected to col­lect 20.5 bil­lion eu­ros for the five-month pe­riod.

The Pa­pan­dreou gov­ern­ment has adopted a yearly, staged cor­po­rate tax re­duc­tion roadmap, in which a 1 per­cent re­duc­tion will be in­tro­duced, start­ing this year. Cor­po­rate tax cur­rently stands at 23 per­cent and is to go down to 20 per­cent by 2014. If any fur­ther tax re­duc­tions are to be in­tro­duced this year and next, then I ex­pect this to be the case in the field of re­duc­ing value-added tax (cur­rently 23 per­cent) and merg­ing ex­ist­ing VAT cat­e­gories from three to two, 20 per­cent and 10 per­cent re­spec­tively.

The the­matic fo­cus of the troika agenda is grad­u­ally be­ing en­larged. To­day, the gov­ern­ment and the troika are dis­cussing:

a) Stim­u­lus pack­ages for the econ­omy;

b) A tar­geted in­vest­ment com­po­nent in­clud­ing projects in sec­tors such as tourism, ship­ping, green tech­nol­ogy and re­tail­ing;

c) The scope and range of col­lec­tive bar­gain­ing agree­ments and to what de­gree em­ploy­ers are bound by them;

d) Pub­lic sec­tor em­ploy­ment lev­els (new re­place­ment ra­tio 1 for 10), the merg­ing of pub­lic or­ga­ni­za­tions (schools, hos­pi­tals, in­surance plus pen­sion funds) and util­i­ties;

e) Broad­en­ing the tax base (re­duc­tion of tax-free in­come thresh­old from 12,000 eu­ros to 6,000 eu­ros);

f) Pri­va­ti­za­tion, the cre­ation of an in­de­pen­dent agency to over­see the pri­va­ti­za­tion drive and how to use pri­va­ti­za­tion rev­enue, re­pro­fil­ing (dif­fer­ent ver­sions).

This ex­ten­sion of the agenda is nec­es­sary and con­struc­tive. It leads away from a far too nar­row fo­cus on spend­ing cuts (6.4 bil­lion eu­ros in 2011) and aus­ter­ity poli­cies.

At the po­lit­i­cal level, Pa­pan­dreou is seek­ing a broader cross-party con­sen­sus in Par­lia­ment, in par­tic­u­lar with New Democ­racy. These ef­forts have not been suc­cess­ful at all. How­ever, while he seeks such con­sen­sus be­tween par­ties he is los­ing con­sen­sus in­side his own gov­ern­ing party. Six­teen PASOK deputies have writ­ten to the prime min­is­ter ask­ing that Par­lia­ment be given time to prop­erly de­bate the new set of aus­ter­ity mea­sures Greece is about to agree with the troika.

Af­ter one year in op­er­a­tion, the present frame­work as agreed in May 2010 be­tween the Pa­pan­dreou gov­ern­ment and the troika is prov­ing to have been un­re­al­is­tic in sub­stance and far too op­ti­mistic re­gard­ing the timetable (e.g. when Greece would be able to re­turn to bond mar­kets). Hence we are now en­ter­ing the re-en­gi­neer­ing phase of the frame­work. What are the pos­si­ble sce­nar­ios in the short term, i.e. un­til end-2011?

a) The op­tion of a vol­un­tary euro exit by Greece is re­jected at the po­lit­i­cal level in Greece and in the EU. How­ever, grad­u­ally a groundswell of skep­ti­cism and even out­right re­jec­tion is gain­ing force within parts of Greek so­ci­ety. The pro­test­ers from the “Won’t Pay” move­ment, who refuse to pay road tolls as well as the “In­dig­nant” move­ment cur­rently oc­cu­py­ing Syn­tagma Square ar­tic­u­late an un­der­cur­rent of drachma nos­tal­gia and anti-EU/anti-euro sen­ti­ment. The com­poser and na­tional icon Mikis Theodor­akis pub­li­cally called for Greece to exit both the eu­ro­zone and the EU dur­ing a May 31 protest rally in front of Athens Univer­sity, re­ceiv­ing long and loud ap­plause for it. Fi­nally, the Greek EU com­mis­sioner for fish­eries, Maria Da­manaki, is said to have warned that ei­ther the cri­sis be soon re­solved or Greece should exit the euro.

b) The op­tion of Greece declar­ing bank­ruptcy or be­ing forced into in­sol­vency, while con­sid­ered re­al­is­tic by many and even es­sen­tial by some com­men­ta­tors, is po­lit­i­cally a non­starter for the Pa­pan­dreou gov­ern­ment, the ECB, the EU and – so far – the IMF (see Lorenzo Bini Smaghi in­ter­view in the Fi­nan­cial Times on May 30, 2011).

c) If the Euro­pean mem­bers of the troika agreed to foot the IMF share in case the lat­ter, tem­po­rar­ily, with­drew or with­held fur­ther fi­nan­cial as­sis­tance, a new as­sis­tance pro­gram for Greece would not be nec­es­sary. How­ever the ques­tion is where would the fi­nan­cial re­sources come from?

(i) The EU fa­cil­ity (EFSM) is al­ready stretched with the Greek, Ir­ish and Por­tuguese obli­ga­tions.

(ii) Al­ter­na­tively, the EFSF could be in­volved in the Greek fi­nanc­ing ar­chi­tec­ture (re­quires man­date ex­ten­sion). The ad­van­tage of this op­tion is that it does not re­quire ap­proval from na­tional par­lia­ments. The dis­ad­van­tage is that the non­in­clu­sion of the IMF would be par­tic­u­larly alarm­ing for Ger­many, which has al­ways in­sisted on the Wash­ing­ton-based lender be­ing in­volved.

d) A new loan guar­an­tee pro­gram is agreed by eu­ro­zone fi­nance min­is­ters and the IMF to the tune of roughly 60 bil­lion to 70 bil­lion eu­ros for Greece. The de­tails to be ad­dressed are man­i­fold:

(i) What would be de­fined as vol­un­tary bur­den shar­ing with pri­vate bond­hold­ers? Any con­sen­sus on co­op­er­a­tive debt ap­proaches, e.i. bond rollovers as a pil­lar of a new aid pack­age, has to be struc­tured in such a way that it does not trig­ger a so-called credit event. In­vestors may be given in­cen­tives such as pre­ferred cred­i­tor sta­tus, higher coupon pay­ments, col­lat­eral or pref­er­en­tial treat­ment in the fu­ture if an­other reschedul­ing is needed.

(ii) A Ger­man plan calls for in­vestors who hold Greek bonds ma­tur­ing be­tween 2012 and 2014 to vol­un­tar­ily ex­change those for new sov­er­eign debt in­stru­ments with an ex­tended ma­tu­rity of seven years. Cred­i­tors would have to be mo­ti­vated to join in such a vol­un­tary ex­change with the help of a so-called “col­lec­tive ac­tion clause.” These would need to be in­tro­duced into ex­ist­ing bond con­tracts in the event not enough pri­vate in­vestors were pre­pared to take part.

(iii) How­ever, to struc­ture a con­ver­sion of sov­er­eign debt while avoid­ing the clas­si­fi­ca­tion of a credit event by rat­ing agen­cies is akin to squar­ing the cir­cle. More­over, debt rollovers may do lit­tle to re­duce Greece’s ris­ing pub­lic debt load.

(iv) What is the range of ad­di­tional con­di­tion­al­ity that Athens would have to ad­here to? Fur­ther tax in­creases, sig­nif­i­cant down­siz­ing of pub­lic sec­tor em­ploy­ment, re­struc­tur­ing, merger or clo­sure of pub­lic en­ti­ties and the ra­tio­nal­iza­tion in en­ti­tle­ments are all on the agenda. What was only re­cently con­sid­ered a red line is fast be­com­ing the or­der of the day, man­dated by the troika and sub­scribed to by the Pa­pan­dreou gov­ern­ment in June 2011.

(v) (i) What is the roadmap and re­al­is­tic timetable for the adop­tion of such a “Greece 2.0” pro­gram? (ii) How will Chan­cel­lor An­gela Merkel in Ger­many or care­taker gov­ern­ments in Bel­gium, Fin­land and Por­tu­gal be able to re­ceive par­lia­men­tary ap­proval for the new fi­nanc­ing fa­cil­ity for Greece?

Ul­ti­mately, a new aid pack­age may be more about buy­ing time for Greece and Europe’s fi­nan­cial sec­tor to pre­pare for any worst-case sce­nario. The strat­egy of play­ing for time will help Europe’s banks pro­vi­sion against fu­ture losses on sov­er­eign debt, first and fore­most from a po­ten­tial re­struc­tur­ing of Greek debt, but pos­si­ble also in­clud­ing Ire­land and/or Por­tu­gal. Fi­nally and per­haps most crit­i­cally, time also en­ables the three pro­gram coun­tries, Greece, Ire­land and Por­tu­gal, to im­ple­ment fis­cal re­forms, re­turn to a pri­mary bal­ances and chart a course to­ward eco­nomic re­cov­ery.

Greece is fac­ing the end of an era. Ev­ery­body knows it. There is noth­ing left in the state bud­get to dis­trib­ute. There is no more cheap money avail­able on in­ter­na­tional bond mar­kets to bor­row. And there is no so­cial con­tract any­more be­tween cit­i­zens/so­ci­ety and the state/po­lit­i­cal elites.

Against this back­ground, one group will fight tooth and nail to pro­tect their en­trenched in­ter­ests. And the other group will con­tinue meet­ing at Syn­tagma Square – un­der the Span­ish-in­spired um­brella term “In­dig­nant” – and shout “Thieves” as well as ’“Go away” at those sitting in Par­lia­ment. At the end of the day, what we are fac­ing to­day and in the com­ing months in Greece is the chal­leng­ing and des­per­ate at­tempt to for­mu­late a new so­cial con­tract be­tween state and so­ci­ety, be­tween po­lit­i­cal elites and cit­i­zens.

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