Tuesday 14 July 2015

Reactions to the Euro Summit Agreement for Greece

Like many others, I’ve been closely following the weekend Eurogroup and Euro Summit meetings for Greece. In this article, I review the Agreement proposed for Greece.
In reviewing this Agreement, I am:
  1. Separating the Agreement itself from the process that led up to it. I do not find it helpful to recount what Schauble said, what Draghi said, etc. The media have been full of these statements, but they detract from our understanding of what is on the table right now.
  2. Avoiding any kind of loaded vocabulary, like “vassal”, “debt colony”, etc. This too is unhelpful and serves more often to subvert facts with emotion, rather than illuminate the facts themselves.
  3. Referencing, where necessary, comments on the current situation back to previous agreements.
The EuroSummit Agreement was reached after a weekend of acrimonious negotiations, first between the Eurogroup (the Eurozone finance ministers) and then between the Euro Summit (the Eurozone heads of state). I have added the exact text at the bottom of this post and in the image gallery.
Going line-by-line through the EuroSummit Agreement, we see the following points.

Page 1: Trust and Conditions Precedent

The statement begins with the need to “restore trust”. This is eloquent testimony to the fact that thanks to the negotiating tactics of Alexis Tsipras and Yanis Varoufakis since February, trust has effectively been destroyed. The SYRIZA-ANEL government, following an extremely offensive, contradictory and illogical negotiating stance, has unfortunately brought itself into this position.
The second point to understand is that Greece must implement certain legal acts as indicators of reform intent. These are conditions precedent to a new loan agreement, and are listed in detail on the following pages.

Page 2: July 15th

The conditions to be implemented are presumably those that the Greek side accepted on July 9th, which have been assessed here. The main points are:
EuroSummit Agreement
the streamlining of the VAT system and the broadening of the tax base to increase revenue
Greece has accepted the principle of 3 VAT levels: 6%; 13%; 23%. Hotel nights increase from 6.5% to 13%; Most food items will be at 13%; restaurants and catering increase to 23% (where they were prior to 2014).
upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform programme
It is unknown whether there has been a further change to the Greek offer of July 9th. However, it is an accepted fact that the pension system must be reformed. Some points, such as the OAEE indexing of social security contributions to salaries, are very positive.
the safeguarding of the full legal independence of ELSTAT
This is extremely positive. Finance Minister Yanis Varoufakis’ last act as Finance Minister was to fire the head of ELSTAT. This should be an independent authority.
full implementation of the relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, in particular by making the Fiscal Council operational before finalizing the MoU and introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions
Greece committed to a Fiscal Council and a “debt brake” in prior treaty commitments. These have not yet been implemented. Although painful, these are good measures. Note that this is “prior to subject approval of the Institutions”.

Page 2: July 22nd

the adoption of the Code of Civil Procedure, which is a major overhaul of procedures and arrangements for the civil justice system and can significantly accelerate the judicial process and reduce costs
It is a well-known fact that the Greek justice system suffers from numerous distortions and major delays. I am not aware of the precise elements of the Code of Civil Procedure, and therefore cannot comment here. However, it seems difficult to see how an entire Code can be transposed into Greek law without an extensive review process. This element, while well-intentioned, may be difficult to implement by July 22nd.
the transposition of the BRRD with support from the European Commission
The Bank Resolution and Recovery Directivewas adapted by the European Council and Parliament on 15 May 2014 and provides a procedure for banking crisis management. This is European law that Greece has already agreed to, but has not yet been adapted into national law. Given the extremely fragile state of the Greek banking system, and the lack of clarity implicit in the current situation, it should be adapted immediately.

These six points are to be adapted by national law within the specified time frame. These are preconditions for beginning negotiations on a new Memorandum of Understanding for a loan agreement from the European Stability Mechanism (ESM).
Many people are probably wondering why this haste is necessary. This is due to two points:
  • On July 20th, Greece has a € 2.1 billion bond redemption to the European Central Bank and € 1.4 billion redemption to Eurozone Central Banks. These, together with the payback of IMF loans, are a precondition for a new agreement to be signed.
  • In order to get at least a bridge finance agreement into place, Eurozone executives or parliaments need to vote on beginning negotiations with Greece. A key point is to see evidence that Greece is implementing what it has so long avoided.

Other Requirements

Beyond this, there are an additional number of policy reforms to implement before detailed negotiations can start, for which no deadlines are specified. These include:
carry out ambitious pension reforms and specify policies to fully compensate for the fiscal impact of the Constitutional Court ruling on the 2012 pension reform and to implement the zero deficit clause or mutually agreeable alternative measures by October 2015
Pension reform is necessary: Greece needs to rationalise and implement reform. This includes an escape clause: “mutually agreeable alternative measures
adopt more ambitious product market reforms with a clear timetable for implementation of all OECD toolkit I recommendations, including Sunday trade, sales periods, pharmacy ownership, milk and bakeries, except over-the-counter pharmaceutical products, which will be implemented in a next step, as well as for the opening of macro-critical closed professions (e.g. ferry transportation). On the follow-up of the OECD toolkit-II, manufacturing needs to be included in the prior action
SYRIZA itself has indicated that it wants OECD support for structural reforms. There is little controversial to this, for which concerns should not be alleviated using proper regulation. Many of these practices, e.g. Sunday trade or bakeries, are already informally in effect.
on energy markets, proceed with the privatisation of the electricity transmission network operator (ADMIE), unless replacement measures can be found that have equivalent effect on competition, as agreed by the Institutions
Privatising ADMIE is designed to promote competition and remove the threat that entrenched incumbents (in this case PPC) use the transmission network on preferential terms. An escape clause is included. This reflects broader EU energy market policy, which Greece has already accepted.
on labour markets, undertake rigorous reviews and modernisation of collective bargaining, industrial action and, in line with the relevant EU directive and best practice, collective dismissals, along the timetable and the approach agreed with the Institutions. On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth
This clause is in fact a climb-down from earlier IMF insistence that collective bargaining essentially be eliminated. Allowing a review of the EU directive and best practice allows Greece the time and space to implement a proper reform.
adopt the necessary steps to strengthen the financial sector, including decisive action on non-performing loans and measures to strengthen governance of the HFSF and the banks, in particular by eliminating any possibility for political interference especially in appointment processes
There is absolutely nothing controversial in this clause. Non-performing loans in Greece constitute a major crisis and an equitable solution is needed for them. Otherwise, the banking sector remains on very shaky ground. Eliminating political interference in appointments is something that every Greek government has promised, but never implemented.

The Privatisation Fund

A key requirement is to establish a larger privatisation programme:
to develop a significantly scaled up privatisation programme with improved governance; 
valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means. The monetization of the assets will be one source to make the scheduled repayment of the new loan of ESM and generate over the life of the new loan a targeted total of EUR 50bn of which EUR 25bn will be used for the repayment of recapitalization of banks and other assets and 50 % of every remaining euro (i.e. 50% of EUR 25bn) will be used for decreasing the debt to GDP ratio and the remaining 50 % will be used for investments. 
This fund would be established in Greece and be managed by the Greek authorities under the supervision of the relevant European Institutions. In agreement with Institutions and building on best international practices, a legislative framework should be adopted to ensure transparent procedures and adequate asset sale pricing, according to OECD principles and standards on the management of State Owned Enterprises (SOEs);
As there have been a number of comments on this in press, I’d like to affirm that:
  1. Greece already agreed to set up a € 50 billion privatisation programme in 2011. The Hellenic Republic Asset Development Fund (also known by its Greek acronym TAIPED) has since then only managed to close about € 3.5 billion in transactions.
  2. Many if not most of the assets should be privatised, given the fact that they are either loss-making at present (and therefore their losses are paid for by Greek taxpayers), or produce zero value as they are idle assets. In many cases, certain assets are a key vector of political corruption via procurement contract kickbacks, or patronage via public sector hirings.
  3. There are many ways to ensure that a privatisation ensures adequate profits for the state, and depends on how the competition and terms are structured. It is incorrect thinking to suggest that these assets will be sold “cheaply to foreigners”. So far, the privatisations that have occurred have Greek majority or minority shareholders, and only in one case is there a valuation issue.
  4. The key issue is not so much the privatisation, as it is ensuring that the Greek state then agrees that investment plans can be licensed. I know of two privatisation transactions where the state did not respect the initial published terms of the privatisation, leading to a situation where although the winner was announced and key facilities were paid, development could not take place. (And I am not referring to SYRIZA’s cancellations or “idling” of all privatisations). Clearly, this is unacceptable as these destroy the image of Greece as an investment or business destination.
  5. There are alternatives to privatisation, i.e. monetisation. One could imagine such alternatives to be bundling real assets as collateral against which capital could be raised, or private equity-style solutions. But privatisation is, in my opinion, the best option. These can be structured as long-term leases or straight sales with equity or EBITDA warrants or options for the Greek state to participate in performance upside.
The repayment objectives of the fund is also a net gain. Previously, all privatisation income was to be used for debt reduction. Now, income from privatisation will be used for:
  1. 50% of income (€ 25 billion) will be used to recapitalise Greek banks
  2. 25% of income (€ 12.5 billion) will be used for public debt reduction
  3. 25% of income (€ 12.5 billion) will be used for investments in Greece
This is therefore a benefit for Greece, compared to its prior commitment of 2011 which was never implemented.
The fund will be based in Greece and managed by Greeks, under international supervision. This is probably necessary given TAIPED’s previous management experience. Again, everything depends on how this will be implemented.

Reforming the Greek Public Sector 

The new Agreement includes the following commitment:
in line with the Greek government ambitions, to modernise and significantly strengthen the Greek administration, and to put in place a programme, under the auspices of the European Commission, for capacity-building and de-politicizing the Greek administration. A first proposal should be provided by 20 July after discussions with the Institutions. The Greek government commits to reduce further the costs of the Greek administration, in line with a schedule agreed with the Institutions;
Every government in Greece, including SYRIZA-ANEL, has promised to de-politicise and improve the Greek public sector. This is a very positive commitment, although also very unrealistic. Let’s see what will actually be implemented. So far, SYRIZA-ANEL has done exactly the opposite: it has sought to politicise every aspect of the Greek government, including by re-hiring 9,000 public sector workers which it manifestly cannot afford.

Re-establishing Troika Monitoring 

SYRIZA promised to expel the Troika monitors and “tear up the Memorandum”. This led to an absurd situation where SYRIZA was actually meeting with monitors in Athens in hotel rooms, and disguising the events as conferences unrelated to government work. The new agreement re-establishes:
to fully normalize working methods with the Institutions, including the necessary work on the ground in Athens, to improve programme implementation and monitoring. The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament. The Euro Summit stresses again that implementation is key, and in that context welcomes the intention of the Greek authorities to request by 20 July support from the Institutions and Member States for technical assistance, and asks the European Commission to coordinate this support from Europe;
This does open Greece up to very intrusive monitoring, particularly the sentence that I have underlined above. Unfortunately, this is a price to pay for how SYRIZA-ANEL have handled things, and regrettably is not much different from how things have been handled since 2012.  It is an abject surrender of national sovereignty. Sadly enough, it is difficult to see how things can function difficulty, given the record of the past 5 months, and the past 5 years.

Clawbacks on Past Legislation 

SYRIZA-ANEL have passed a number of laws since February 2015 which must now be re-examined. It is difficult to see exactly how these will take place.
With the exception of the humanitarian crisis bill, the Greek government will reexamine with a view to amending legislations that were introduced counter to the February 20 agreement by backtracking on previous programme commitments or identify clear compensatory equivalents for the vested rights that were subsequently created. 

Debt Sustainability 

The Agreement does make a specific mention of debt sustainability through reprofiling:
There are serious concerns regarding the sustainability of Greek debt. This is due to the easing of policies during the last twelve months, which resulted in the recent deterioration in the domestic macroeconomic and financial environment. The Euro Summit recalls that the euro area Member States have, throughout the last few years, adopted a remarkable set of measures supporting Greece’s debt sustainability, which have smoothed Greece’s debt servicing path and reduced costs significantly. 
Against this background, in the context of a possible future ESM programme, and in line with the spirit of the Eurogroup statement of November 2012, the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme and will be considered after the first positive completion of a review. 
The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken.


Media reports and politicians since Saturday have emphasised the dictatorial or non-democratic method in which the Agreement was reached. However, a closer look at the actual Agreement parameters in light of:
  • SYRIZA’s unrealistic domestic political promises that got it elected;
  • SYRIZA’s incoherent negotiating strategy which alienated every creditor and did nothing to support the Greek economy, and
  • The consistent failure by successive Greek administrations to implement structural reform since this crisis started in late 2009
  • The very dismal reality of Greek public and private sector operations
reveals that this Agreement is hardly the holocaust commentators have been claiming.
Undoubtedly it re-introduces intrusive monitoring in which every Greek draft law affecting macroeconomic and fiscal operations must be approved. Undoubtedly it represents a loss of national sovereignty (much of which was already compromised by EU and ERM entry to begin with).
And, as I have described in other articles, many of the specific measures are regressive and will not lead to the results hoped for: raising VAT, the shipping tax, etc.
This is, however, the first document which re-confirms the importance of growth (via privatisations, which are undoubtedly controversial).
But the commentators I have read fail to outline what the alternative may be. How else should official creditors who have already lent € 240 billion to Greece deal with a government that has branded them “terrorists” and “pillagers”?
How else to deal with a government that has promised to “end austerity” and “tear up the Memorandum” while at the same time requesting new loans?
As mentioned in many other posts: Greece has a fundamental choice. By joining the European Union and other multilateral organisations such as the World Trade Organisation or the International Monetary Fund, Greece voluntarily agreed to accept a series of rules-based, verifiable commitments.
It cannot both expect the gain the benefits of these organisations while simultaneously absolving itself of all responsibilities. This is a fool’s errand.
That fundamental choice remains with Greece today. Accept this Agreement, which is far better than what I would have expected given the events of the past 5 months. Or quite simply continue to default, leave the Eurozone and accept the consequences of that.

© Philip Ammerman, 2015