The Greek government’s political leaders were unable to reach an agreement last night over the renewed austerity measures demanded by the Troika as a condition for the second bail-out package. Pressure mounted after Angela Merkel indicated in a press conference in Paris that time was running out:
"I honestly can't understand how additional days will help. Time is of the essence. A lot is at stake for the entire euro zone."
Yet a review of the negotiations indicate that while some of the problem lies with Greece’s leaders, a lot of the fault lies with the Troika and its own negotiating process. A bit of background should serve to illustrate this problem.
The European leaders and the IMF have known since June 2011 that a second Greek bail-out was required. This was formalised at the summit meeting of October 26th, which resulted in a formal announcement that a second bail-out package of EUR 130 billion would be granted on the condition that an agreement on Private Sector Involvement (PSI) and a further austerity package would be reached.
After nearly a one-month delay due to the replacement of George Papandreou as Prime Minister, the new Greek government started work. While PSI negotiations were already underway, it should be noted that the final agreement will only be announced on February 15th. A large part of the delay to date has been due to these negotiations, which were effectively taken over by Germany in January. In other words, Greece is not solely responsible for this delay.
A further problem is that of the Troika’s monitoring mission and how it works. This mission implements a quarterly review of the Greek “reform” programme (so far there has been very little real structural reform, but a lot of fiscal tinkering, which is why I use quotations marks).
The last quarterly review took place in mid- to-late January, and determined that Greece was far from meeting several key reform targets, including public sector cutbacks, liberalisation of certain professions, closing public sector organisations, and privatisation.
This resulted in the presentation of new demands for austerity, which were also mandated by certain Eurozone countries. Yet these demands were made approximately 2 weeks ago. Certain of these demands are set to lead Greece to an even deeper recession, and include:
· Elimination of the 13th and 14th wage in the private sector
· Reduction of the minimum wage by 20%
· Reduction of supplemental pensions by 15-20%
· Reduction of public sector headcount by 15,000 workers in 2012.
It is interesting to note that according to Minister of Interior Reppas, this last demand was made this past Friday, February 3rd.
I don’t know of many countries where the political leaders, confronted by such demands in a 2-week timeframe, would have done a better job. It is both hypocritical and unhelpful for Angela Merkel and Nicholas Sarkozy to hold a press conference and demand immediate concessions, given the magnitude of the changes requested, as well as the way in which they have been requested.
None of this, however, should excuse the Greek government from an almost criminal lack of urgency and prioritisation in terms of its policy planning and choices. However, we should reflect why this is taking place:
· The original bail-out of EUR 110 billion occurred in May 2010, already delayed by four crucial months (due to German dithering), which worsened the credit climate permanently.
· The original bail-out was wrongly defined and made no provision for interest costs. It mandated a face-value repayment of privately-held Greek government bonds, at the time when the private sector was discounting these by 35-40%.
· The original bail-out package envisioned that Greece would continue to incur deficits to 2015, while returning to the markets in 2012. At the same time, it deliberately avoided the consolidation of Greek government debt, which occurred in November 2010. This caused a 3% rise in Greek debt, effectively destroying the credibility of the Greek programme. These problems were widely known, and have been extensively reported in this blog.
· Structural “reforms” in 2010 led to a reduction in the public sector workforce of 82,000-85,000 people, together with a restructuring of the regional public administration, a reduction in public sector salaries and all wages above EUR 1,400 by 15-20%, an increase in the retirement age, and the effective end of early retirement in the public and private sectors.
· These “reforms” led to a recession in 2010, with a decline in real GDP of 3.5% and a deficit of 10.6% of GDP. The recession grew in 2011, with a forecast real GDP decline of 5.5%. Inflation in 2010 was 4.7%; in 2011 it is forecast at 3.1%. This is largely due to the impact of indirect taxes on fuel and value-added tax. Greece is therefore in an inflationary depression.
· In mid-2011, it was clear that the Greek structural adjustment programme was losing traction. The Troika forced through a second round of austerity in July 2011, known as the Mid-Term Fiscal Adjustment Programme. This included the highly improbable target of achieving EUR 50 billion in privatisation income to 2015, together with a further EUR 28 billion in austerity savings by 2015. Yet it made no provision for interest income or the fact that Greek government bonds were being sold at a major discount. A quick analysis shows that accrued interest between 2011-2015 at a minimum rate of 4% would amount to EUR 76 billion, or just under the EUR 78 billion which was to be gained by privatisation and austerity.
· This second round of austerity illustrated in a nutshell the abysmal failure of Troika policy-making. In Greece and elsewhere, it was painfully apparent that EUR 50 billion in privatisation in 5 years in the middle of a global financial crisis was going to amount to one result: a massive give-away of public property, which at the end would barely pay interest income, and which could not be used to purchase Greek debt on the open market at a discounted rate. Despite this, European leaders pig-headedly demanded this reform, and then expressed indignation when it could not be met. To soften the blow, an initial private sector involvement of 21% of net present value of Greek government bonds held by the private banking and financial sector was proposed.
· Greece has actually tried to privatise a number of assets in 2011, including the government’s stake in the Athens International Airport. Most of these failed, primarily due to a lack of finance for such deals, and uncertainty regarding Greece.
· By October 2011, it was clear that further efforts were needed. European leaders forced through a PSI (private sector involvement) of 50%, in exchange for a further EUR 130 billion in bank recapitalisation and debt refinancing. A further condition for this was large-scale, further austerity. When the Greek prime minister tried to put this to referendum, he was called to Cannes, and forced to retire by his own party, as well as Nicholas Sarkozy and Angela Merkel.
· It is ironic to note that this same prime minister, in an apparent bid to gain approval for the first bail-out, agreed to buy 6 French FREMM frigates, 40 French Rafale fighters, several German submarines and 120 German Leopard tanks prior to the first bail-out. This was estimated to cost over EUR 10 billion, at a time when Greece could not afford to pay salaries or hospital costs. We should be under no illusions as to the “solidarity” of the Eurozone in this case.
· The October 2011 agreement was prefaced by the Finnish demand for a sovereign guarantee. This created at least a month of further useless negotiations which led nowhere.
· In November 2011, a new government was formed, led by Prime Minister Lukas Papademos, but comprising mainly political figures from PASOK, New Democracy and LAOS. The record so far has been much of the same, with the government continually responding to Troika demands, with very little time to deal with anything strategic or sustainable.
The year 2011 closed with unemployment just under 20%, a deficit of approximately 9-10% of GDP, and a real GDP decline of approximately 4%. Under these conditions, and taking into account the impact on wages and pensions from the latest austerity demanded, it is almost impossible that Greece will meet either the privatisation target in 2012, or the deficit target.
In all this debate about “reform”, I have not heard of or seen a single pro-growth proposal, except for the very dubious “Helios” proposal, which is based on an incomplete feasibility study and a high government involvement. Without growth, no amount of austerity will result in Greece meeting it’s “targets”, which are themselves rapidly-moving targets.
The entire record of the Eurozone and IMF intervention in Greece has been disastrous. European policy-makers have compounded error after error; the Greek political system has clearly not helped.
Once again, we are in a situation where external sovereign lenders are threatening Greece with default or Eurozone exit if further “reforms” are not enacted. These lenders don’t appear to have the slightest understanding of basic macro and microeconomics, let alone the situation as regards “competitiveness” in Greece.
8 September 2011
22 August 2011
20 June 2011
18 February 2011
25 October 2010
15 February 2010
8 December 2009
(c) Philip Ammerman, 2012
Navigator Consulting Group