Economist: Greek deal still more likely than falling-out
First entry: 29 May 2015 - 15:51 Athens, 12:51 GMT
Last update: 15:51 Athens, 12:51 GMTPolitics
THE
latest episode in Greece’s long-running economic drama is coming to a
head. Since the victory of the radical-left Syriza party in the election
of late January, Greece’s creditors and the new government headed by
Alexis Tsipras have been exchanging threats. A resolution of some kind
must occur in June, and sooner rather than later in the month.
It could still be a disastrous falling-out that leads to Greece defaulting on official loans, imposing capital controls, freezing deposits and tumbling out of the euro. But as time and money run out, the concentrating of minds on both sides seems likely to bring a deal.
Mr Tsipras is the one under most pressure. A recent payment to the IMF of €750m ($825m) was made only by drawing down a special account Greece held at the fund. Next month the government is due to pay the IMF double that amount, starting with €300m on June 5th. It may not be able to: a government minister said on May 24th that the money wasn’t there. Even if the first instalment can be rustled together, the government will be hard-pressed to find the €300m due on June 12th and the €600m due on the 16th; a further €300m is due on the 19th. Redemptions of €6.7 billion of bonds held by the European Central Bank (ECB) loom in July and August—an impossibility without more help from the country’s creditors.
The government has been able to pay the IMF, as well as wages and pensions, only through a series of increasingly desperate manoeuvres. Local authorities have been ordered to provide the central government with their reserves. Other public-sector organisations are being raided for whatever cash they hold. Arrears are piling up as firms that have provided services to the state go unpaid and exporters wait in vain for VAT refunds.
These tactics can be deployed for only a limited time. They are also counter-productive, since they harm the private sector and thus depress tax receipts. Greece has already fallen back into recession, aborting the recovery that got under way in the first nine months of 2014. The economy shrank by 0.4% in the final quarter of 2014 and a further 0.2% in the first quarter of 2015. The European Commission forecast in May that the economy would grow by just 0.5% this year; it had forecast growth of 2.9% in November. A broad measure of economic sentiment, which had improved in line with the GDP data last year, has plunged this spring, suggesting that the recession will deepen (see chart).
The position of Greek banks is almost as untenable as the government’s; it is a moot point which will buckle first. The banks have been able to cope with capital flight and cash hoarding only by borrowing from the ECB, mostly through a massive amount of “emergency liquidity assistance”, which can be cut off at any point if a two-thirds majority of the ECB’s governing council objects to it.
The mounting pressure on Greece is causing the government to negotiate meaningfully after months of stalled talks. The decision in late April to sideline Yanis Varoufakis, who had alienated his fellow euro-zone finance ministers through an abrasive and confrontational approach, helped. Mr Tsipras, who is now heavily engaged in the process and has struck a broadly conciliatory tone, rallied his party behind his negotiating stance on May 24th, which includes some “red lines” that he insists must not be crossed.
Greece’s plight is also goading its creditors. They are torn between two imperatives: demonstrating that club rules must apply to all members and trying to prevent “Grexit”. Although the wider risks arising from Greece leaving the euro area appear less grave than in 2012, when Grexit was last feared, the impact of such a traumatic event is incalculable. Even if the short-term injuries could be treated (under the anaesthetising effects of the ECB’s purchases of sovereign bonds through its quantitative-easing programme), it would weaken the monetary union in the long run. Henceforth membership of the euro would be regarded as just another transient system of fixed exchange rates.
Though there are still difficult compromises to be made, the outlines of a deal are coming into focus (even if claims by the Greek government that one was being drafted this week were promptly denied by European officials). The dire condition of the economy means that the previous objective for a primary budget surplus (ie, excluding interest payments) of 3% of GDP this year is no longer attainable. Planned future surpluses of over 4% will also have to be reduced.
Greece’s negotiators, for their part, have accepted the need to simplify its VAT system, which could yield extra revenue of up to 1% of GDP. That should help offset the damage from the downturn. The government has toned down its anti-privatisation rhetoric and is pressing ahead with the sale of its stake in Greece’s biggest port. It will have to accept more privatisations, not least since they yield revenue. Even Mr Tsipras’s “red lines”—no further cuts in pensions or public wages—are smudgeable. Creditors are not calling for cuts in public wages and pension spending can be reduced in a variety of indirect ways, such as reducing the scope for early retirement.
With so much to lose on both sides and little to gain (other than painful assertions of principle), a deal still appears the most likely outcome despite the fraught nature of the negotiations. An agreement will not immediately unlock new money since disbursements will require parliamentary approval in creditor countries such as Germany. But it would enable the ECB to help overcome the immediate cash crisis by temporarily raising the amount of short-term debt the Greek government can issue. That, however, will only pave the way for the next episode in the drama: negotiating a whole new bail-out agreement.
The Economist
It could still be a disastrous falling-out that leads to Greece defaulting on official loans, imposing capital controls, freezing deposits and tumbling out of the euro. But as time and money run out, the concentrating of minds on both sides seems likely to bring a deal.
Mr Tsipras is the one under most pressure. A recent payment to the IMF of €750m ($825m) was made only by drawing down a special account Greece held at the fund. Next month the government is due to pay the IMF double that amount, starting with €300m on June 5th. It may not be able to: a government minister said on May 24th that the money wasn’t there. Even if the first instalment can be rustled together, the government will be hard-pressed to find the €300m due on June 12th and the €600m due on the 16th; a further €300m is due on the 19th. Redemptions of €6.7 billion of bonds held by the European Central Bank (ECB) loom in July and August—an impossibility without more help from the country’s creditors.
The government has been able to pay the IMF, as well as wages and pensions, only through a series of increasingly desperate manoeuvres. Local authorities have been ordered to provide the central government with their reserves. Other public-sector organisations are being raided for whatever cash they hold. Arrears are piling up as firms that have provided services to the state go unpaid and exporters wait in vain for VAT refunds.
These tactics can be deployed for only a limited time. They are also counter-productive, since they harm the private sector and thus depress tax receipts. Greece has already fallen back into recession, aborting the recovery that got under way in the first nine months of 2014. The economy shrank by 0.4% in the final quarter of 2014 and a further 0.2% in the first quarter of 2015. The European Commission forecast in May that the economy would grow by just 0.5% this year; it had forecast growth of 2.9% in November. A broad measure of economic sentiment, which had improved in line with the GDP data last year, has plunged this spring, suggesting that the recession will deepen (see chart).
The position of Greek banks is almost as untenable as the government’s; it is a moot point which will buckle first. The banks have been able to cope with capital flight and cash hoarding only by borrowing from the ECB, mostly through a massive amount of “emergency liquidity assistance”, which can be cut off at any point if a two-thirds majority of the ECB’s governing council objects to it.
The mounting pressure on Greece is causing the government to negotiate meaningfully after months of stalled talks. The decision in late April to sideline Yanis Varoufakis, who had alienated his fellow euro-zone finance ministers through an abrasive and confrontational approach, helped. Mr Tsipras, who is now heavily engaged in the process and has struck a broadly conciliatory tone, rallied his party behind his negotiating stance on May 24th, which includes some “red lines” that he insists must not be crossed.
Greece’s plight is also goading its creditors. They are torn between two imperatives: demonstrating that club rules must apply to all members and trying to prevent “Grexit”. Although the wider risks arising from Greece leaving the euro area appear less grave than in 2012, when Grexit was last feared, the impact of such a traumatic event is incalculable. Even if the short-term injuries could be treated (under the anaesthetising effects of the ECB’s purchases of sovereign bonds through its quantitative-easing programme), it would weaken the monetary union in the long run. Henceforth membership of the euro would be regarded as just another transient system of fixed exchange rates.
Though there are still difficult compromises to be made, the outlines of a deal are coming into focus (even if claims by the Greek government that one was being drafted this week were promptly denied by European officials). The dire condition of the economy means that the previous objective for a primary budget surplus (ie, excluding interest payments) of 3% of GDP this year is no longer attainable. Planned future surpluses of over 4% will also have to be reduced.
Greece’s negotiators, for their part, have accepted the need to simplify its VAT system, which could yield extra revenue of up to 1% of GDP. That should help offset the damage from the downturn. The government has toned down its anti-privatisation rhetoric and is pressing ahead with the sale of its stake in Greece’s biggest port. It will have to accept more privatisations, not least since they yield revenue. Even Mr Tsipras’s “red lines”—no further cuts in pensions or public wages—are smudgeable. Creditors are not calling for cuts in public wages and pension spending can be reduced in a variety of indirect ways, such as reducing the scope for early retirement.
With so much to lose on both sides and little to gain (other than painful assertions of principle), a deal still appears the most likely outcome despite the fraught nature of the negotiations. An agreement will not immediately unlock new money since disbursements will require parliamentary approval in creditor countries such as Germany. But it would enable the ECB to help overcome the immediate cash crisis by temporarily raising the amount of short-term debt the Greek government can issue. That, however, will only pave the way for the next episode in the drama: negotiating a whole new bail-out agreement.
The Economist