More pain for Greece before debt relief

Monday’s Eurogroup handed Greece’s ruling leftists only a little satisfaction. While it welcomed the €5.4bn in austerity measures passed the previous day, it also demanded a slate of contingency measures to be activated should tax revenues sag.

These, it says, would be “automatically implemented as soon as there is objective evidence of a failure to meet the annual primary surplus targets in the programme.” 

If these temporary measures were enacted, they would be made permanent the following year, “in order to bring the budget structurally back on track.”

The government in Athens is talking down the contingency measures as “a Greek proposal for the creation of a pre-emptive mechanism”. It is unlikely, however, that Eurozone finance ministers will agree to such a Greek mechanism.

The additional measures they require ultimately stem from the International Monetary Fund’s belief that the austerity hitherto undertaken won’t be enough to see Greece reach a surplus of 3.5 percent of GDP. That is the surplus Greece committed itself to reaching when it signed its third bailout loan last July. The surplus – which is the cash left in the treasury after the government has met its domestic commitments – is to be handed to creditors as debt repayment.

In a letter to Eurozone finance ministers on Friday, IMF chief Christine Lagarde said she believes an “additional adjustment effort equal to 2 percent of GDP” would be needed to achieve this; and this, she said, “would only be credible based on long overdue public sector reforms, notably of the pension and tax system.” She goes on to say: “Unfortunately, the contingency measures Greece is proposing do not include such reforms.”

Contrary to the statement issued by the Greek finance ministry on Monday night, therefore, the contingency measures are likely to be the focus of intense negotiation because Syriza has made protection of pensioners and the state two its key policy platforms.

The government is also making much of the Eurogroup's assertion that it “stands ready to consider, if necessary, possible additional debt measures aiming at ensuring that Greece's refinancing needs are kept at sustainable levels in the long-run.”  This includes looking at “longer grace and payment periods”, and would appear to hand Syriza the Holy Grail of the debt relief it has demanded since coming to power 15 months ago.

The problem is that this debt restructuring cannot take place, the Eurogroup says, until after Greece has successfully completed its current, three-year bailout by the European Stability Mechanism in July 2018. It is this programme that demands the surplus of 3.5 percent of GDP. If Lagarde is right, and she usually is, the contingency measures will more likely be needed than not.

It would appear that the Syriza government has now twice committed the same tactical blunder: passing measures pre-emptively in hopes of presenting them as a fait-accompli to its Eurozone partners, only to be told to go back and do more. This is what happened after last year’s July 5 referendum, when Syriza ignored the “No” vote to austerity, pre-emptively approved the terms it had been handed for a third bailout, and was then told to do more in the form of prior actions.

Of course, who is to say that the Eurogroup wouldn’t have been harsher on Greece, had no bill gone through parliament prior to Monday’s meeting? The political reality, however, is that Prime Minister Alexis Tsipras, who already looked haggard in Sunday’s parliamentary debate, has to find the political capital to pull his slim majority of three MPs through another excoriating parliamentary experience, and approve a contingency worth about €3.5bn.

Hours before the Eurogroup result was known, dozens of army officers held a mirthless ceremony before parliament on Syntagma Square to celebrate the official and of World War Two. It was a moment when Greece was a valued part of the Western alliance that defeated the Axis powers, and Germany the black sheep of Europe. How times change.