Beware the unintended consequences in Greece

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.

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14 Responses to Beware the unintended consequences in Greece

  1. Jerry Melinn says:

    It appears to me that Greece will be out of the Euro currency before the end of the year. The issue is whether the EU ejects Greece or Greece leaves. Greek politicians haven’t got the discipline to implement the terms of the bailout memorandum, so eventually the Troika will no longer tolerate this failure. My guess is that the Troika will refuse further tranches of the loan and Greece will default. This will allow Greek politicians to ‘play the victim’ for the home constituency and for EU to say it didn’t put Greece out but it was the Greeks themselves who made this happen. All the language from the EU since the last election has been about “the solution being in the hands of the Greeks themselves” and is indicating this outcome.

  2. Greeks voted to stay in the euro! sounds like they want their baklava and eat it.
    They must realise their only solution, painful as it is, is to drop the Euro and go back to the drachma. A former economic adviser to the Greek government of Lucas Papademos – said “The solution is not a Greek exit but growth. A two-year extension of fiscal adjustment, as reportedly sought by the Greek government, would moderate the impact of austerity. Greece can return to growth through a double boost of faster structural reforms and a direct investment stimulus. EU instruments such as structural funds and more money from the European Investment Bank and the European Investment Fund would help.
    But isn’t uncertainty surrounding Greece in itself destabilising? Perhaps, but a Greek exit from the euro would be even worse. If Europe were to accept a Greek exit it would raise the risk of full eurozone break-up. The claim to an irreversible monetary union would be shattered. The eurozone would surrender to endless speculation over which country would be next. Depositors would start a run on banks in other peripheral countries and panic could ensue. Bailout programmes would be overwhelmed by the instinctive response of frightened investors.”

    this sounds like Greek blackmail to me.

  3. kevbarry says:

    This is all a neolib asset stripping exercise on a continental scale. The people in charge don’t care two hoots about the damage being done to the social fabric of Europe. They know nothing about how to properly organise a human society on a compassionate and altruistic basis. They care only for their greedy selfish selves. This destruction of Greece, and other countries, will continue until their is nothing left to asset strip. This is why Greece will be allowed to stay within the Eurozone until it’s just a skeleton. So watch out for surprise ‘compromises’ until the bones are picked dry. The European ‘leadership’ are a just bunch of no hope flat earthers.

  4. Pingback: Update on Greece

  5. Thomas Esmond Knox says:

    kevbarry “They care only for their greedy selfish selves.”

    You put your money in first, then I will think about putting in an equal sum.

    No guarantees.

    Talk is cheap.

  6. lloydchin says:

    The expenditure target is only supportable if tax revenues come through the door. Reports indicate that tax revenues are down because the Greek economy is contracting by about 7%. We can’t blame people who hang on to their Euros to feed the family, plus Euros will be worth a lot more than Drachmas when Greece converts. So, maybe it’s not that surprising that the Greek Government has run out of money. Papademos (the ex PM) estimated they would run out by the end of June, so they’ve done well to last till the 17th day of August.

  7. PWP says:

    Sadly, for the Greeks there are no palatable choices. They no longer have any sovereignty and their future will be decided elsewhere. As I see it there are four options for Greece, starting from most likely to least:

    1- Greece is expelled from the EZ and returns to a Drachma that devalues quickly
    2-the Germans, after doing a cost/benefit analysis decide to leave the EZ and with perhaps with a few other northern states introduce a new currency, leaving the south with a devalued but still intact euro
    3-after Greece’s exit, all hell breaks loose and Italy, Spain etc bolt as well after interest rates soar, causing the euro to disintegrate
    4-EZ political leaders somehow find the leadership and strength to do what they all know needs to be done to have a currency union, mutualize debts, a banking union to recapitalize the banks

  8. Wiz says:

    Very good analysis by Megan, of course, and by PWP, with whom I agree. In fact I think there will be a picking off of Spain and Italy after Greece goes, but also Germany will leave. It will be a combination of 2 and 3, I think. But the bit that nobody talks about is the bank run. A bank run is already taking place, very slowly, across Greece and Spain. The Greeks are watching their government’s paralysis and know the next few months could well result in a leftist takeover. At the same time the choice, starker than ever, is to adopt austerity. Even if they choose this, their government won’t follow through. Brussels is watching keenly, but is not showing a lead. I am quite sure that, eventually, the people will decide and will make the first move. They will take their money out of the banks, and capitalism, as we have come to know it in the West, will collapse. When France’s banks go so will ours, and when ours go so will Germany’s. Nobody is talking about what happens then.

  9. Larry says:

    Megan; what are your thoughts on ECB taking a haircut on their Greek debt? Seems like this could prolong the agony a little longer.

    • Megan Greene says:

      I don’t think we’ll see it happen any time soon. The ECB is understandably opposed because it would compromise the central bank’s independence (let alone its balance sheet). But in my opinion this is the only credible way for the ECB to address investor concerns about seniority as Mario Draghi promised at the August ECB governing council presser.

      • Ernesto says:

        The other credible way that squares with all concerns is to wait till the ESM passes on Sept 12th. and then sell the ECB Greek bonds at cost and net of payments to the EFSF. The EFSF then restructures them in similar fashion as the Greek PSI. I see this happening by October meeting latest.

  10. PWP comments hits the nail on the head in stating “They (the Greeks) no longer have any sovereignty…” Given the long history of Greece this is not a new situation but is still very unpleasant for a proud people. Perhaps the EU has too many divergent societies to remain united. Time for soul searching.

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