The Daily Update - Greece

Pierre Moscovici, the European Economic Affairs Commissioner, has made it clear that IMF involvement is viewed as essential to the Greek bailout stating “The commission is convinced that we must not do, will not do, without the Fund.”  However, the IMF is insistent that for their involvement there has to be a realistic plan making Greece’s liabilities sustainable. The IMF takes issue with the primary budget surplus target (as a percentage of GDP before interest payments) and the lack so far of any form of debt relief. Christine Lagarde stated, “The 3.5% in the short term might be achievable by some heroic, and I really mean heroic, efforts on the part of Greece and the Greek people.”  Moreover, “what we find highly unrealistic, on the other hand, is the assumption that this primary surplus of 3.5% can be maintained over decades. That just will not happen.”

The current program review is underway and needs a positive review before further funding can be unlocked.  There has been some sort of progress on privatisation in that a controlling stake in Piraeus Port Authority has been sold to the China COSCO Shipping Corporation, although Greece’s strategy of relying on taxes rather than greater pension reform to meet targets has remained a contentious subject.  But the IMF has complicated the issue arguing that an additional budgetary savings of ~€3bn are in fact required to meet the 3.5% target (by 2018) creating scope for another stand-off between Greece and its creditors; although the IMF thinks ‘excessive austerity’ is unhelpful and a budget surplus of 1.5% of GDP combined with debt relief is more realistic.  The IMF’s call for contingent fiscal measures is being debated at a meeting of EU Finance Ministers today in Amsterdam.

One issue at the moment is whether Alexis Tsipras, the Greek Prime Minister, if required by the creditors, can in fact get additional austerity measures through parliament; the Syriza coalition controls just 153 out of 300 seats and any additional measures are likely to be met with a good deal of resistance. However, there is some time in that Greece’s next loan repayment of €3.5bn to the ECB is not due until July. Plus, the latest Eurostat figures exceeded the bailout target which may allow greater leniency in requiring any additional savings: the Eurostat figures showed Greece’s government debt to GDP ratio easing to 176.9% at the end of 2015 and a primary surplus (excluding interest payments and other one-off items) of 0.7% of GDP versus an adjusted primary deficit target of 0.25% under its bailout program. If interest repayments and the bank recapitalisation are included the deficit was 7.2% of GDP.

Moscovici has stated that after this review is complete the debt issue is open for discussion and comments from Jeroen Dijsselbloem, the Dutch Finance Minister, have also eluded to scope to discuss managing the ‘uncertainties’ around some of the longer term program targets. While Germany has been adamant that a ‘haircut’ is not possible some sort of compromise ultimately seems highly likely.  

The issue of growth versus budget austerity is not just a ‘Greek problem’ but remains a contentious issue particularly in Southern Europe where deflationary pressures are greater.  Elevated debt levels within the eurozone’s rules based framework, combined with reluctance to adopt a more expansionary fiscal stance by countries with the scope to do so (e.g. Germany which is running a budget surplus), has constrained eurozone fiscal policy leaving monetary policy as the main policy lever.  Structural reforms remain essential as a medium term driver of growth by boosting competitiveness and productivity.  But yesterday’s ECB statement warned, “As emphasised repeatedly by the Governing Council, and as strongly echoed in both European and international policy discussions, in order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively, both at the national and at the European levels.”  

Inevitably, with a more populist coalition government in Portugal, mounting support for more populist parties in Spain and the Italian Prime Minister, Matteo Renzi, more vocal on the need for more pro-growth policies the magnitude of stringency applied to fiscal measures will increasingly be debated.