Greece makes up its mind on debt goals

Af­ter much con­fu­sion on what re­lief mea­sures Athens wanted, Hou­liarakis seems to have set out a clear tar­get

Kathimerini English - - Focus - BY NICK MALKOUTZIS

ANAL­Y­SIS For the first time since Ya­nis Varo­ufakis went to his first Eurogroup meet­ing in February last year armed with a polem­i­cal speech and a Burberry scarf, we now have a rel­a­tively clear idea of what the Greek govern­ment would be sat­is­fied with in terms of debt re­lief.

Speak­ing to a par­lia­men­tary sub­com­mit­tee on Thurs­day, Al­ter­nate Fi­nance Min­is­ter Gior­gos Hou­liarakis set out in the most de­tail seen so far the type of mea­sures that Athens would seem­ingly be con­tent with. Never be­fore has an of­fi­cial from this coali­tion set out clearly the pa­ram­e­ters of what is ac­cept­able to Athens.

The last few weeks have seen al­most ev­ery mem­ber of the coali­tion from Prime Min­is­ter Alexis Tsipras down dis­cuss debt re­lief. This cre­ated a ca­coph­ony from which it was dif­fi­cult to ex­tract any use­ful con­clu­sions, es­pe­cially as most of the state­ments were rather vague gen­er­al­iza­tions about how nec­es­sary a re­duc­tion in Greece’s pub­lic debt is, or how pos­i­tive its ef­fect could be.

The govern­ment seemed as con­fused as those try­ing to de­ci­pher its mes­sages. When Deputy Prime Min­is­ter Yian­nis Dra­gasakis ap­peared be­fore the same sub­com­mit­tee as Hou­liarakis in Septem­ber and played down ex­pec­ta­tions of some­thing sig­nif­i­cant hap­pen­ing on the debt front in the com­ing months – ex­plain­ing that it is a process that will largely kick in from 2018 on­wards – the coali­tion’s im­me­di­ate re­ac­tion was to try to re­vive hopes of some­thing big be­ing achieved in the short term.

Hou­liarakis, though, ap­pears to have dis­pelled the doubts and cleared up any con­fu­sion. Speak­ing to par­lia­men­tary deputies last week, he said that the govern­ment ac­cepts the bench­mark for debt sus­tain­abil­ity set by the May 24 Eurogroup.

The eu­ro­zone fi­nance min­is­ters set out gross fi­nanc­ing needs (the sum of bud­get deficits and funds re­quired to roll over or pay debt that ma­tures dur­ing the year) as the yard­stick for judg­ing whether Greek could meet its debt com­mit­ments. They agreed that Greece’s gross fi­nanc­ing needs should re­main be­low 15 per­cent of gross do­mes­tic prod­uct un­til 2030 and not ex­ceed 20 per­cent af­ter that.

Mov­ing ahead

The al­ter­nate min­is­ter’s clar­i­fi­ca­tion seems to have laid to rest the re­cent de­bate over how to judge whether Greece’s debt is sus- tain­able or not. In pre­vi­ous years, the to­tal debt stock as a per­cent­age of GDP and debt ser­vic­ing costs against GDP were used as meth­ods to mea­sure sus­tain­abil­ity.

Work­ing on the gross fi­nanc­ing needs prin­ci­ple, Hou­liarakis then pro­ceeded to pro­pose a cou­ple of meth­ods by which the Greek debt could be made sus­tain­able in the medium term. Us­ing cal­cu­la­tions made by the Coun­cil of Eco­nomic Ad­vis­ers (SOE) and the Pub­lic Debt Man­age­ment Agency (PDMA) he sug­gested that one op­tion to en­sure that Greece’s gross fi­nanc­ing needs re­main be­low 15 per­cent of GDP un­til at least 2030 is to fix the in­ter­est rates on the loans Greece has re­ceived at lower lev­els.

Apart from tweak­ing the in­ter­est rates, the other path pro­posed by the Greek of­fi­cial is to also ex­tend the ma­tu­rity of the loans Greece re­ceived from the Euro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity (EFSF), which have a weighted av­er­age ma­tu­rity of around 31 years and amount to al­most 131 bil­lion eu­ros. This is just un­der half of the to­tal lend­ing Athens has re­ceived so far through the three bailout pro­grams.

Ac­cord­ing to Hou­liarakis, this ap­proach would have the ad­van­tage of re­duc­ing Greek debt, in net present value terms, to 80 per­cent of GDP over a 40-year-pe­riod from the cur­rent level of close to 180 per­cent of GDP.

In per­haps the most im­por­tant part of his ex­pla­na­tion in Par­lia­ment, Hou­liarakis stressed the need for the debt re­lief mea­sures to trans­late into lower pri­mary sur­plus tar­gets in the fu­ture. He ar­gued this would al­low the govern­ment the nec­es­sary fis­cal space to re­duce per­sonal and cor­po­rate tax; moves which should have a pos­i­tive mul­ti­plier ef­fect for the lo­cal econ­omy.

Not fea­si­ble

Un­der a sce­nario put to­gether by the Euro­pean Sta­bil­ity Mech­a­nism (ESM) that does not in­clude any re­lief, Greece would have to reach a 3.5 per­cent of GDP pri­mary sur­plus in 2018 and then main­tain it for 10 years. To do this, it would also need an av­er­age an­nual growth rate of 3.3 per­cent. Given the eco­nomic dev­as­ta­tion Greece has been through dur­ing the cri­sis, it is lit­tle won­der that hardly any­body thinks this is any­where near fea­si­ble.

Hou­liarakis ar­gued that aim­ing for a 3.5 per­cent pri­mary sur­plus for any more than one year would be too much of a risk. Debt re­lief would al­low these tar­gets to be low­ered with­out any dan­ger of Greece’s gross fi­nanc­ing needs ex­ceed­ing the com­fort zone es­tab­lished by May’s Eurogroup de- ci­sion. In its own anal­y­sis, the Bank of Greece re­cently sug­gested that Greece could aim for pri­mary sur­pluses of 2 per­cent af­ter 2018 and main­tain its debt at sus­tain­able lev­els if loan ma­tu­ri­ties are ex­tended by 20 years and there is a smooth­ing out of de­ferred in­ter­est pay­ments over a 20-year pe­riod.

The sig­nif­i­cance in all this is that the Greek side – which has been largely a by­stander in the debt dis­cus­sion even though it is the party that will be most af­fected by the out­come of the talks – has fi­nally set out some pro­pos­als and cleared up in its own mind on what it wants to achieve.

It ap­pears to have aban­doned any thoughts of walk­ing away from ne­go­ti­a­tions with the prize pack­age of an all-en­com­pass­ing deal. Short-term mea­sures are a given as all sides have agreed that the Euro­pean Sta­bil­ity Mech­a­nism should put them to­gether, but it is sig­nif­i­cant that Athens now seems to ac­cept that what it would like to achieve on top of that is the defin­ing of the medium-term mea­sures so they can be ap­plied when the time comes.

There is still no guar­an­tee this will hap­pen, as some eu­ro­zone play­ers do not want to have this dis­cus­sion now, but at least the pa­ram­e­ters of the dis­cus­sion are now clearer.

What re­mains is for Greece and the in­sti­tu­tions to con­clude the sec­ond review within the next few weeks to al­low time for the dis­cus­sion to take place be­fore at­ten­tion in Europe shifts to a se­ries of na­tional and pres­i­den­tial elec­tions next year and the mat­ter is put on ice. Athens took a great deal of time to make up its mind about debt re­lief; it must now move quickly to have a chance of se­cur­ing a deal that meets its goals.

Gior­gos Hou­liarakis said last week in Par­lia­ment that the govern­ment ac­cepts the bench­mark for debt sus­tain­abil­ity set by the May 24 Eurogroup.

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