Test­ing times for Greek gov’t as pres­sure mounts

Do­mes­tic pol­i­tics, de­vel­op­ments in the broader re­gion and the eu­ro­zone’s need to main­tain sta­bil­ity could scup­per coali­tion’s plans

Kathimerini English - - Focus - BY LEONIDAS STERGIOU

ANAL­Y­SIS The re­cent de­ci­sionby the Coun­cil of State con­cern­ing the TV li­cense auc­tion has piled po­lit­i­cal pres­sure on the coali­tion, which also has to face the eu­ro­zone’s un­will­ing­ness to dis­cuss debt re­lief, as well as the strict stance of the coun­try’s lenders on the sec­ond bailout re­view.

The ver­dict of the coun­try’s high­est ad­min­is­tra­tive court that the gov­ern­ment’s law for restruc­tur­ing the me­dia is in vi­o­la­tion of the Greek Con­sti­tu­tion dam­aged the coali­tion’s cred­i­bil­ity re­gard­ing its pledge to fight cor­rup­tion.

In the mean­time, the cred­i­tors have re­jected Prime Min­is­ter Alexis Tsipras’s promise to pro­tect in­debted Greeks’ bank ac­counts from seizures and a uni­ver­sal debt set­tle­ment scheme for house­holds, self-em­ployed in­di­vid­u­als and cor­po­ra­tions, while the first round of talks for the sec­ond re­view was con­cluded with­out any agree­ment on Thurs­day.

All of these is­sues have cast doubt on whether the ex­pected cab­i­net reshuf­fle will have the de­sired re­sults. Tsipras had been hop­ing to use it to re­vive his gov­ern­ment’s flag­ging im­age and lead to the next step of the econ­omy’s re­cov­ery, which in­cludes mak­ing Greek bonds el­i­gi­ble for the Euro­pean Cen­tral Bank’s quan­ti­ta­tive eas­ing (QE) pro­gram.

The Greek premier has ad­mit­ted that there was no progress in talks on debt re­lief on the side­lines of the last EU sum­mit. There­fore his gov­ern­ment needs to fo­cus on QE by con­clud­ing the sec­ond re­view as soon as pos­si­ble. Tsipras needs this to send a pos­i­tive mes­sage and off­set the tough mea­sures of the cur­rent me­moran­dum and those that will arise from the sec­ond re­view.

The gov­ern­ment’s orig­i­nal plan an­tic­i­pated a con­clu­sion of the sec­ond re­view on Oc­to­ber 27. How­ever, the key mile­stone has been moved to De­cem­ber 5, when the Eurogroup will con­vene. If the Eurogroup ap­proves the sec­ond re­view, this will pave the way for Greek bonds to be in­cluded in the QE pro­gram, pro­vid­ing some re­lief to the econ­omy and boost­ing the gov­ern­ment’s pop­u­lar­ity.

More­over, the gov­ern­ment be­lieves that a neg­a­tive out­come with re­gard to debt re­lief dur­ing the sec­ond re­view should not re­duce Athens’s ef­forts to­ward the im­ple­men­ta­tion of the pro­gram, and it plans to bring up the debt is­sue again dur­ing the Mediter­ranean Sum­mit on Jan­uary 28-29 in Lis­bon.


Tsipras’s plans for a reshuf­fle, as well as the ex­pec­ta­tions for a pos­i­tive pro­gram re­view and QE are at risk. Let’s take a look at some facts: First, it will be very dif­fi­cult for the In­ter­na­tional Mon­e­tary Fund and the eu­ro­zone to reach a com­pro­mise on the Greek debt by the end of the year. Sec­ond, the IMF and the ECB will con­duct their own, sep­a­rate debt sus­tain­abil­ity analy­ses. Third, the ECB has un­der­taken ac­tion be­hind the scenes to broach a com­pro­mise be­tween the IMF and the euro- zone, which would ef­fec­tively re­quire Ger­many to change its po­si­tion.

Greece be­lieves that if the coun­try meets all its obli­ga­tions and con­cludes the sec­ond re­view in time, the out­come of the ECB’s debt sus­tain­abil­ity anal­y­sis will be pos­i­tive and open the door for the bank’s Gov­ern­ing Coun­cil to in­clude Greek bonds in its QE pro­gram. In this case, Greece will be able to ac­cess mar­kets, liq­uid­ity will in­crease and the Greek econ­omy’s cred­i­bil­ity will start to re­cover.

How­ever, it is our opin­ion that there are many tech­ni­cal and po­lit­i­cal risks in the above sce­nario.

Ac­cord­ing to the plan, the ECB’s debt sus­tain­abil­ity anal­y­sis will be con­ducted in De­cem­ber, a month be­fore the IMF’s. There are se­ri­ous po­lit­i­cal and cred­i­bil­ity risks if the ECB con­sid­ers the Greek debt sus­tain­able but the IMF does not. In this case, the eu­ro­zone’s cred­i­bil­ity and the su­per­vi­sion of the bailout pro­gram (as well as the IMF’s par­tic­i­pa­tion as a tech­ni­cal advisor) will be weak­ened.

Sec­ond, the IMF and the eu­ro­zone may de­lay the con­clu­sion of the sec­ond re­view, mak­ing the ECB’s debt sus­tain­abil­ity anal­y­sis ir­rel­e­vant. Third, the IMF and the eu­ro­zone are aware of the ECB’s al­ter­na­tives: The ECB might ap­prove QE for Greece with­out the prior full con­clu­sion of the sec­ond re­view or a pos­i­tive debt sus­tain­abil­ity anal­y­sis by the IMF, or the ECB will take into ac­count its own anal­y­sis and/or Greece’s abil­ity to ac­cess mar­kets.

This sce­nario con­tains the fol­low­ing dif­fi­cul­ties: If the re­view is not con­cluded, no so­lu­tion for the debt is found and the IMF’s debt sus­tain­abil­ity anal­y­sis is not pos­i­tive, then the ECB will rec­om­mend that Athens is­sue new debt in early 2017. By is­su­ing a small debt, Athens will be able to ac­cess mar­kets and show in­vestor con­fi­dence. With this move, the ECB will try to dis­con­nect a de­ci­sion for QE from the sec­ond re­view, as well as the IMF’s debt sus­tain­abil­ity anal­y­sis and its con­tri­bu­tion to the pro­gram. This sce­nario may be con­ve­nient for the IMF and Ger­many, be­cause the IMF will not con­trib­ute to the pro­gram and QE will help Greece to fi­nance its needs, mak­ing ad­di­tional eu­ro­zone as­sis­tance un­nec­es­sary.

How­ever, this so­lu­tion would come at a heavy po­lit­i­cal cost for Greece, be­cause it would en­tail:

Athens reach­ing an agree­ment with the troika for the medium-term fi­nan­cial ad­just­ment pro­gram (fis­cal tar­gets for the next five years, in­clud­ing the tar­gets for the pri­mary sur­pluses).

Hard re­forms in the la­bor mar­ket (leg­is­la­tion changes for dis­missals in the pri­vate sec­tor, new min­i­mum wages, curbs on unions and strikes etc).

Full es­tab­lish­ment of the new pri­va­ti­za­tion fund.

Fur­ther­more, if the lenders fore­see SYRIZA’s pop­u­lar­ity de­te­ri­o­rat­ing and a new gov­ern­ment led by New Democ­racy emerg­ing soon, they will likely de­lay the ne­go­ti­a­tions and the re­view un­til the cur­rent coali­tion col­lapses.

In our opin­ion, Greece will not make any progress on its debt or QE un­less a pre­lim­i­nary com­pro­mise is achieved be­tween the IMF and the eu­ro­zone, even if un­of­fi­cial. Al­ter­na­tively, the ECB will force Athens to adopt hard re­forms for it to al­low Greece to join its QE pro­gram.

The bot­tom line is that the fu­ture of the sec­ond re­view and the ben­e­fits to the Greek gov­ern­ment are re­lated di­rectly to the re­la­tion­ships be­tween the IMF and the eu­ro­zone.

Geopo­lit­i­cal fac­tors

Be­yond the tech­ni­cal and po­lit­i­cal fac­tors in the Greek debt is­sue, a ma­jor is­sue is geopo­lit­i­cal de­vel­op­ments linked to the US elec­tions and the plans of the big play­ers in the broader East­ern Mediter­ranean re­gion.

The facts at the mo­ment are that the US is mainly fo­cus­ing on its elec­tions, Turkey and Rus­sia are be­com­ing ma­jor play­ers in the re­gion, de­vel­op­ments in Syria are help­ing Turkey and Rus­sia’s plans, and Turkey sees Athens as be­ing un­will­ing to put pres­sure on Cyprus for a com­pro­mise to the Turk­ish-Cypriot is­sue. More­over, a change in the map re­gard­ing Syria may raise doubts about bor­ders in gen­eral and put pres­sure on Greece with re­gard to Thrace and the East­ern Aegean is­lands, as Turkey’s pres­i­dent, Re­cep Tayyip Er­do­gan, and the Turk­ish me­dia are al­ready (di­rectly or in­di­rectly) chal­leng­ing bor­ders, the force of in­ter­na­tional treaties etc.

Other fac­tors at play are the weak­en­ing of Iraq, the pos­si­bil­ity that the Kur­dish is­sue may desta­bi­lize Greek-Turk­ish re­la­tions, the roles that key play­ers (the US, the eu­ro­zone, Rus­sia and Turkey) would pur­sue in the broader re­gion, and the fact that the US will most likely par­tic­i­pate in this game fol­low­ing the elec­tions, re­gard­less of the out­come.


We can­not ig­nore the IMF’s role in the US-eu­ro­zone re­la­tion­ship or the eu­ro­zone’s stance vis-a-vis Greece on a se­ries of is­sues such as en­ergy and the refugee cri­sis, par­tic­u­larly as re­gards Greece and Turkey.

An­other fac­tor to con­sider is un­cer­tainty in the eu­ro­zone. Start­ing with Italy’s ref­er­en­dum and end­ing with Ger­many’s elec­tions next year, we can see that ne­go­ti­a­tions with the UK over Brexit will be fraught. Thus, Europe (and the eu­ro­zone) is ex­pected to avoid in­creas­ing un­cer­tain­ties by cre­at­ing de­lays and prob­lems in the Greek bailout. While this is con­sid­ered very ra­tio­nal, the stance is not shared by all EU and eu­ro­zone mem­bers, though it is sup­ported by US di­plo­macy. In our un­der­stand­ing, the US prefers co­op­er­a­tion so that the new rules will be rewrit­ten in fa­vor of Amer­i­can and eu­ro­zone in­ter­ests, not Rus­sian in­ter­ests. Also, Turkey would be bet­ter con­trolled by the US and the eu­ro­zone rather than Rus­sia.

In this con­text, we can­not see the above de­vel­op­ments not hav­ing an im­pact on the Greek re­view, the IMF’s de­ci­sions, the Greek debt, re­forms in the en­ergy mar­ket, or the cred­i­tors’ will­ing­ness to take the risk to help or desta­bi­lize Tsipras.

Premier Alexis Tsipras (c) had been hop­ing to use a cab­i­net reshuf­fle as a means of re­viv­ing his gov­ern­ment’s flag­ging im­age.

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