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.  

No comments:

Post a Comment

Note: only a member of this blog may post a comment.