Greece’s prob­lems will not be cured by EU’s bit­ter medicine

The China Post - - COMMENTARY - BY JONATHAN EYAL

Greece’s Par­lia­ment con­venes to­day to de­bate the terms of the coun­try’s latest fi­nan­cial bailout deal with the Euro­pean Union.

Prime Min­is­ter Alexis Tsipras, who came to power early this year de­mand­ing an end to such bailouts, is now ad­vo­cat­ing ap­proval for a bun­dle of loans which he claims “are the best Greece could have ob­tained,” and rep­re­sent “the only way” of avert­ing bank­ruptcy and the coun­try’s evic­tion from the euro zone.

But the pack­age, which “can amount to 86 bil­lion eu­ros” (US$95.77 bil­lion) of fresh Euro­pean cred­its over three years as the text of the deal claims, is still vague on some key de­mands Greece has to com­ply with.

And po­lit­i­cal sup­port for the adop­tion of the bailout agree­ment re­mains frag­ile, not only in Greece it­self but also among the coun­try’s Euro­pean cred­i­tors.

Greek ne­go­tia­tors boast that they have suc­ceeded in per­suad­ing EU gov­ern­ments to re­duce the tough fis­cal tar­gets im­posed on the coun­try dur­ing two pre­vi­ous bailout pack­ages.

So, in­stead of hav­ing to pro­duce a pri­mary sur­plus — more gov­ern­ment rev­enues than spend­ing be­fore the money due for debt re­pay­ment is fac­tored in — equiv­a­lent to 3 per­cent of Greece’s gross do­mes­tic prod­uct this year, Athens will be al­lowed to ac­tu­ally run a deficit of 0.25 per­cent, and will be ex­pected to pro­duce a pri­mary sur­plus of only 0.5 per­cent of GDP next year, ris­ing to a still mod­est 1.5 per­cent sur­plus in 2017.

That means Tsipras can spend more than he raises in taxes this year, and does not need to cut spend­ing as dras­ti­cally as orig­i­nally in­tended for the next two years.

But Greeks are still ex­pected to pro­duce a very tough pri­mary sur­plus of 3.5 per­cent of GDP by 2018, so the crunch point is merely post­poned.

Mean­while, the gov­ern­ment is still ex­pected to ap­ply 35 new “ur­gent mea­sures,” in­clud­ing cuts in pen­sions, a rise in sales tax and slash­ing the civil ser­vice pay­roll.

Greek ne­go­tia­tors have also not suc­ceeded in get­ting agree­ment to write off some of the coun­try’s to­tal debt which, at 330 euro bil­lion, is about 180 per­cent of the coun­try’s econ­omy, a fig­ure which the In­ter­na­tional Mon­e­tary Fund now ac­cepts is not sus­tain­able.

But Ger­many, which claims that debt for­give­ness is illegal un­der EU treaties, has merely agreed to dis­cuss the ques­tion again in the fu­ture.

Un­cer­tainty also sur­rounds the fate of the coun­try’s banks, most of which need to be re­cap­i­tal­ized, “since they no longer ful­fill their role to fi­nance en­ter­prises and house­holds,” says Dr. Niko­laos Ge­orgikopou­los, an ex­pert on the Greek econ­omy who is now based at the Stern School of Busi­ness in New York.

The snag is that no­body knows how big the prob­lem is; es­ti­mates done by some econ­o­mists sug­gest that up to 45 per­cent of all the loans on the Greek banks’ books are “non- per­form­ing,” a more po­lite way of say­ing that they are un­likely to be re­paid.

One way of deal­ing with the prob­lem is to im­pose a “hair­cut” — a loss — on bank de­pos­i­tors, some­thing that will hit Greek cor­po­ra­tions and busi­ness hard.

The only other op­tion is that Greece gets yet another loan to re­cap­i­tal­ize its banks.

But un­der cur­rent reg­u­la­tions that will also re­quire the im­po­si­tion of a hair­cut on de­pos­i­tors, and will add an es­ti­mated 25 bil­lion eu­ros of ex­tra gov­ern­ment debt.

Un­sur­pris­ingly, there­fore, the prob­lem of Greece’s fi­nan­cial in­sti­tu­tions re­mains un­re­solved.

Yet the big­gest dif­fi­culty is po­lit­i­cal. Hav­ing urged his fel­low Greeks to vote “no” to a pre­vi­ous bailout pack­age in a ref­er­en­dum last month, Tsipras finds it dif­fi­cult to ar­gue for the adop­tion of a much tougher EU pack­age now.

Some of the rul­ing Syriza party’s left­ist MPs are pledged to vote against the bailout pro­pos­als, and although Tsipras can rely on op­po­si­tion votes to push the deal through, the con­sen­sus is that, if fewer than 121 of Syriza’s 149 MPs sup­port the bailout when the vote is held tonight, the gov­ern­ment will be doomed, and new gen­eral elec­tions will have to be held.

As ever, time is not on Greece’s side. Euro zone fi­nance min­is­ters are sched­uled to give their fi­nal nod on the deal to­mor­row pro­vided the Greek Par­lia­ment had given its con­sent.

Any de­lay will make it im­pos­si­ble for Greece to honor a 3.2 bil­lion eu­ros debt re­pay­ment due to the Euro­pean Cen­tral Bank due next week.

And the longer the saga drags on, the higher the chance that Ger­many will re­vive its sug­ges­tion that Greece should “tem­po­rar­ily” leave the euro zone.

It is this fear which may ul­ti­mately per­suade Greece to ac­cept the bit­ter medicine it is be­ing ad­min­is­tered, although no­body be­lieves this will solve its prob­lems.

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