Friday, 24 February 2017

Creditors prepare to squeeze Greece


The Eurogroup meeting at the beginning of this week appeared to offer a glimmer of hope that Greece would fairly swiftly conclude its current assessment by its creditors, the International Monetary Fund and the Eurozone.

Eurogroup chairman Jeroen Dijsselbloem, who could never be accused of irrational exuberance (or any kind of exuberance at all), said “the institutions have enough confidence and a common agreement to go back to Athens.” He added that there would be “a change in the policy mix, moving away from austerity and putting more emphasis on deep reforms.”

All this was received with a certain amount of relief in Athens, which was facing another 2015-type situation of a prolonged negotiation at Greek expense, culminating in a default. Greece must pay the European Central Bank some seven billion euros in July, which it will not have without clearing the current assessment. In 2015 Greece actually defaulted on the International Monetary Fund after months of talks without agreement.

The government issued a non-paper confirming that it had committed to legislating tax and pension reforms now, which will apply after its current programme ends in mid-2018. In return, it hopes to be allowed to bring back collective wage bargaining, abolished in an austerity bill in February 2012.

This was already an unfavourable position for the government. It had drawn a line in the sand at passing further spending cuts or raising taxes, arguing that it is already performing above expectations. Tax revenues for 2016 produced a €4.4bn euro surplus, or roughly 2 percent of GDP, above the stipulated target of 0.5 percent.

The reforms are demanded by the IMF, which insists that the measures Greece has undertaken so far will not produce the surplus of 3.5 percent of GDP the eurozone insists Greece maintain for a number of years. Greece disagrees with the IMF’s assessment.

Developments since that Eurogroup are not favourable for the government in Athens. US Treasury Secretary Steve Mnuchin told the Wall Street Journal on Thursday that Greece is Europe’s problem, removing any hope in Athens that the Trump administration will upend the hard line on Greece.

The Syriza government’s strategy of driving a wedge between its European creditors and the IMF, which it perceives as promoting a neoliberal agenda of further austerity, also seems to be failing. The IMF will head the negotiating strategy when teams return to Athens on Tuesday.

The IMF has been at loggerheads with those European creditors – the European Central Bank, the European Financial Stability Fund and the European Stability Mechanism, over the sustainability of Greek debt. The IMF made its position clear in a preliminary debt sustainability analysis in Oct. 2015, and finalised it in spring 2016. In December 2015, Poul Thomsen published a blog post entitled "The IMF Is Not Asking Greece for More Austerity". However, at the crucial May 2016 Eurogroup, where Greek debt was the main discussion, Christine Lagarde avoided a clash with Germany and went off to Almaty to attend a conference.

On Wednesday IMF Managing Director Christine Lagarde upheld the IMF’s long-standing position that Greece needs longer maturities and lower interest rates in order to be able to repay its €326bn debt. It considers the debt currently unsustainable. According to German newspaper Handelsblatt, German Chancellor Angela Merkel has also been persuaded to back some sort of debt relief along those lines, despite polls showing that about half of German voters are against it.

In the long run, Merkel's agreement to debt relief in principle may benefit the Greeks. In the short term, her newfound harmony with Lagarde will spell pressure on Greece.  

Monday, 13 February 2017

Greek economy to grow, if it stays the course of adjustment

Bank of Greece Governor
Yannis Stournaras

Greece's economy is on track to grow significantly this year for the first time since the beginning of the Great Recession in 2008, but that prospect could still be dynamited by its failure to stay the course of its current adjustment programme.

That was the upshot of the speech given by Greece’s central banker, Yannis Stournaras, to parliament today. Presenting the Bank of Greece’s Interim Report on Monetary Policy, he predicted growth of 2.5 percent of GDP this year and three percent in the next two years. This is close to the growth of 2.7 percent forecast by the International Monetary Fund and the European Commission.  

However, Stournaras warned that the figures were contingent on Greece’s staying the course of fiscal discipline and continuing to receive handouts from its eurozone partners until its programme ends in mid-2018. He warned the government to conclude its current assessment sooner rather than later. “There is no rational choice between concluding the assessment now or later. Conditions will be much worse later,” he said.

The ball in Greece’s court?

The ball is in Greece’s court to signal that it will legislate a new round of austerity measures, according to latest news reports from Brussels. The measures, which are part of Greece’s assessment under its bailout terms, were apparently discussed last Friday between Greek finance minister Euclid Tsakalotos and Eurogroup president Jeroen Dijsselbloem, and are said to amount to two percent of GDP, or €3.4bn.

“We made substantial progress today and are close to common ground for the mission to return to Athens the coming week,” Dijsselbloem had said on Friday. Until Monday afternoon there was no public word from Athens that it had given the go-ahead.

Defence minister Panos Kammenos told the weekend edition of Efimerida ton Syntakton that, “We are not going to legislate news measures. This is absolutely clear.” Kammenos, who is Prime Minister Alexis Tsipras’ coalition partner, also said the government would not legislate spending cuts that would take effect after 2018, when Greece’s current programme ends. He sounded confident that there will be a solution to Greece’s current assessment before the next Eurogroup on February 20.

The government is in part biding its time, encouraged by the rapid rise in opinion polls of Germany’s Social Democrat leader Martin Schultz. He is challenging Chancellor Angela Merkel and her austerity-based European policy in this autumn’s election.

Schulz’ position is having an effect on the political debate in Germany, where media are beginning to question the merits of allowing Greece to leave the eurozone – a position Germany’s powerful finance minister Wolfgang Scheauble favours – versus keeping the eurozone whole.

"Anyone who raises the issue of Grexit now is playing with the division of the continent,” Schulz said on the campaign trail. “This is perhaps in the interest of Donald Trump or Marine Le Pen, but certainly not in the interest of Germany and Europe. This is dangerous.”

Schulz’ inclusive attitude to Europe has deep roots. As president of the European Parliament he had told Greek lawmakers as long ago as 2012, that “Europe is not a community based on austerity. Europe is a community based on solidarity.” 

If the reports from Brussels are accurate, however, the Eurogroup is assuming Germany’s hard line of forcing the Greeks to generate a primary surplus of at least 3.5 percent of GDP.

Migrant relocation

Separately, the European Commission on Monday published its ninth monthly report on relocation of refugees. It says that member states have volunteered to relocate 11,966 asylum applicants (8,766 from Greece and 3,200 from Italy). The target, set in September 2015, is to relocate 160,000, in order to relieve pressure on asylum boards in the two countries that have received most of the refugee flows of the past several years in the EU.

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The relocation programme was one of the EU’s main responses to the Europe-bound refugee flows of 2015. Both as an attempt to solve the practical difficulties of processing so many applicants, and as a show of European solidarity, it has been of limited success. Initial uptake was slow, and several EU members – Poland, Austria, Hungary and Denmark – refused to offer quotas, while the Czech Republic has taken just 12 applicants. However, uptake has speeded up in recent months, and the Commission has prioritised the programme in spite of the naysayers. 
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Wednesday, 8 February 2017

IMF calls on Greek state to pay its share of austerity

The International Monetary Fund says Greece's austerity package is failing because the public sector hasn't made as many sacrifices as the private sector, and because banks haven't been enabled to finance the growth of business. 

Its annual country report, released on Tuesday, also ominously warns that even if Greece does everything it should to boost productivity and growth, its debt will eventually drown any recovery and needs to be restructured. 

"Only about a quarter of the overall adjustment was directed at reducing public sector wages and pensions," the IMF says. 
Greece spent more than €12bn on public sector salaries last year, and another €22bn on pensions and other social benefits (see table below). Together, the two absorbed 70 percent of tax revenue. The government's 2016 pension reform relied on raising contributions from those still in work and lowering their future pension payouts, but made no further cuts to current pensioners. The IMF calls on it to do so. 

Banks 
Greeks now also own the highest level of nonperforming loans in the eurozone - 45 percent of loans aren't being repaid, quadruple the rate of nonpayment at the beginning of the crisis. Banks are having difficulty closing the books on these loans by repossessing homes or by selling off the bad loan portfolio, partly because the government has not provided all the legal tools for doing so. Doing this requires the government to legislate exactly which debtors may be evicted from primary residences, which carries political risk. 

The IMF wants the government to broaden the tax base by lowering tax exemptions, currently at €8,630 for salaried employees and farmers, because half of them declare annual income below that level. "More than half of wage earners are exempt from paying personal income tax compared to the euro area average of 8 percent," it says. 

This will be difficult. Farmers, representing a fifth of workers, are currently asking for the tax exemption to be raised. Self-employed professionals, who represent almost a third of workers and had their tax exemption completely removed under the conservatives (2012-14), demand that it be reinstated. 

Then there is the thorny issue of debt. The IMF refused to be part of Greece's third bailout in 2015 on the grounds that its debt is unsustainable. The Fund's charter doesn't allow it to extend loans to countries that already have unsustainably high debt. The eurozone wants the IMF to be involved. The powerful German finance minister Wolfgang Scheauble recently threatened that without the IMF the bailout facility might be brought to a halt, bankrupting Greece and forcing it out of the eurozone. 

The IMF says the measures Greece has undertaken as part of its third bailout loan amount to four percent of GDP, but are "heavily reliant on revenue measures" for three quarters of that, leading to "further increases in already high taxes on narrow bases." 

The IMF's thorniest disagreement with the eurozone, however, is that the eurozone, as the largest owner of Greek debt, needs to give Greece decades longer to repay it. "Even with these ambitious policies in place, Greece cannot grow out of its debt problem. Greece requires substantial debt relief from its European partners to restore debt sustainability," it says. 


The IMF's modelling suggests that without restructuring, the debt will reach almost three times the size of GDP by 2060, and servicing it will absorb revenue equal to two thirds of GDP, a clearly impossible task. 

Tuesday, 7 February 2017

IMF split on Greek debt



Greece’s most senior creditor, the International Monetary Fund, appears divided on how to address Greece’s debt, which it has called unsustainable. The Fund’s Executive Board on Monday refused to say whether it would support Greece’s current bailout, which puts its continuation in doubt.

The disagreement centres on how much of its economy Greece should spend repaying debt. The eurozone, which holds the majority of Greek debt, wants it to spend 3.5 percent of its economy - something Greece committed to doing by 2018 in return for its third bailout loan in 2015. The IMF believes Greece must be given longer to repay its loans, allowing it to spend 1.5 percent of its economy a year.

The eurozone's method, demanded principally by Germany, would require greater cuts in public spending. While a majority of Executive Board members did not press for such cuts, some disagreed: “Most Directors agreed that Greece does not require further fiscal consolidation at this time, given the impressive adjustment to date which is expected to bring the medium-term primary fiscal surplus to around 1½ percent of GDP, while some Directors favored a surplus of 3½ percent of GDP by 2018,” the Fund said in a press release.

Greek debt stands at an unsustainable 350bn dollars, almost twice the size of the economy. The International monetary fund says that without significant debt relief from the eurozone Greece won't be able to grow out of its debt problem. According to a leaked IMF estimate, the debt will explode to 275 percent of GDP - almost three times the size of the economy – after 2022. That’s because the interest rate Greece pays on much of its debt will rise from an average 2.5 percent today to about seven percent, as its grace period comes to an end in five years.

The IMF’s refusal to be involved in the Greek bailout could derail the European plan, and that would ultimately bankrupt Greece. “Come July, Greece will be unable to roll over its obligations. Greece owes seven billion that need to be repaid – bonds held by the European Central Bank and market participants,” says Greece’s former IMF representative Miranda Xafa. “Greece will not be able to meet those payments without external financing from official creditors.”

Technically that would be the end of the line as far as Greece’s membership in the eurozone is concerned, unless Greece and its creditors can figure out a way to keep the bailout process running.

Greece has achieved what many economists believe is the biggest fiscal adjustment in postwar developed economies. In 2009 it spent 15 percent of GDP more than it made in tax revenues. By 2014 it had balanced its budget, although Greece is still in deficit if one includes the money it has to spend repaying its debt.

Fund directors agreed that the Greek government needs to earn more in personal income tax. This has fallen from €11bn in 2008 to €7.6bn last year, as unemployment rose and salaries fell during the Great Recession of the intervening period. Directors also agreed that Greece has taken too long to settle the large outstanding bill taxpayers have with the government and consumers have with banks. Tax arrears stand at a record €95bn, while non-performing loans are estimated at over €100bn.

Tuesday, 31 January 2017

The Greek debt

The International Monetary Fund will on February 6 likely deal a blow to Germany's ambition to involve it in the current Greek bailout. On that day it is expected to declare the Greek debt unsustainable, which bars it from involvement. An IMF report prepared for the meeting, leaked to Kathimerini and the Financial Times, says the Greek debt, which is currently worth €330bn, or 180pc of GDP, will grow to 275pc of GDP in the next four decades.

The debt’s sheer size threatens not only to unravel the bailout. It is the principal cause of Greece's inability to grow. The government has to impose such high taxes to keep up payments to creditors, there is little money left over for re-investment in new business.

New figures from the General Secretariat of Public Revenue show that Greeks reneged on a record level of tax obligations last year -  €13.9bn. Together with past tax arrears, the total is a record €95bn, about half the value of the economy. The government has managed to produce a surplus in 2016, but only by withholding vast amounts from its suppliers, which further starves the economy.

Against this backdrop of institutional gridlock, the Greek government is also at an impasse regarding the implementation of the next round of austerity, which it feels will spell political suicide. Without those measures, Greece will be unable to receive more loan instalments. Economists give it until July to go bankrupt if nothing is done. 
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