Beware the unintended consequences in Greece
August 16, 2012 14 Comments
Greece will be back in the spotlight of the EZ crisis in September for sure, but it has been creeping onto the stage in August as well. Even before the troika conducts its quarterly review on Greece’s progress in hitting the targets set out in the bailout program, there are a few indications that progress hasn’t been good. This week, the government imposed a spending moratorium and reports surfaced that prime minister Samaras will propose to the troika that Greece’s fiscal targets be relaxed. These are obviously not encouraging signs, but they have potentially huge implications for Greece going forward that extend beyond just the next troika review.
First, the Greek government has imposed a moratorium on all outlays other than salaries and pensions, according to Greek newspaper Kathimerini. This means that primary spending, the public investment programme and the settlement of arrears have been halted. Greece has outperformed its expenditure targets, with government spending between January and end-July at EUR40.9bn (compared with a target of EUR45.3bn). If the Greek government is actually ahead on its spending targets, why freeze outlays? My guess is that the Greek government is trying to build up a cash buffer, which is not a bad idea for a country on the brink of bankruptcy. If the government reduces its services and stops paying down arrears to suppliers, however, will anyone feel incentivized to pay their taxes? I doubt it. Outperforming on the expenditure side of its fiscal targets will do the Greek government no good if it falls woefully behind on the revenues side.
Second, the Greek government has reportedly decided to propose a relaxation of its fiscal targets to Merkel and Hollande next week. Having been unable find agreement among the Greek coalition partners on EUR11.5bn in savings (a whopping 5% of Greek GDP), prime minister Antonis Samaras will request that the adjustment be made between 2012-16 instead. He is also likely to suggest that the budget deficit be slashed by 1.5 percentage points of GDP annually rather than the current 2.5 percentage points.
This will be a very hard sell for the Greek government. A relaxation of fiscal targets would require additional funding for Greece, but asking the Bundestag to approve more bailout money for the small country is an absolute non-starter. Instead, Athens expects to raise the additional funds from an IMF loan, T-bill issues and a postponement in the repayment of Greece’s EU/IMF loans until 2020.
How likely is this proposal to be accepted by the troika? The German government immediately responded to the news by reiterating that it is in favor of Greece’s memorandum of understanding…exactly as it currently exists. That certainly does not bode well for the troika signing up to a relaxation of Greece’s targets. Even if Germany were on board, the rest of the troika may not be. The IMF’s continued participation in the Greek bailout is in question given that it is increasingly difficult to demonstrate that Greece is “fiscally sustainable”—even according to the extremely low bar of public debt/GDP stabilizing at 120% by 2020 that the IMF previously set. The troika may also oppose delaying the repayment of Greek bailout loans given the precedent that would set for the other bailout countries.
If the troika does not grant the Greek government any concessions on its bailout programme, it is highly likely that the two junior parties—the Democratic Left and Pasok—will drop out of government. This would precipitate fresh elections, the third for this year alone.
Even if temperatures are meant to be dropping in Athens in the autumn, the social, political and economic situation will certainly be heating up.