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From the troika to the quartet
Greece is currently in complex and politically contentious negotiations with a quartet of international creditors about a third financial assistance package.
These negotiations are taking place in Athens, with ministers and mission chiefs meeting onsite instead of having to choose locations in Paris and Brussels as happened since mid-2014. The political symbolism of this logistical change is noteworthy and tells us something about who has the stronger hand in these meetings.
The target date for the conclusion of negotiations is 18 August, two days before Greece has a 3.2 billion euro bond repayment to the European Central Bank (ECB). However, the growing speculation that Greece may have to secure a second bridge loan to cover the ECB repayment if negotiations over the third programme are not concluded on time lacks substance to date.
If an agreement can be reached with the ECB, the International Monetary Fund (IMF), the European Commission and the European Stability Mechanism (ESM), the newcomer making the quadriga, it would be Greece’s third macro-economic adjustment programme in five years, after the first in 2010 and second in 2011.
Adopting a further raft of economic, fiscal and administrative policy changes in exchange for a multi-year financial assistance programme remains politically contentious in Greece. Re-establishing trust and credibility are essential parts of the current negotiating agenda after seven months of furtive attempts to reach a viable compromise.
Micro-managing the Greek real economy remains the focus of the international creditors. Greece has to comply with reform requirements that stretch from streamlining the VAT system, broadening the tax base to increase revenue, improving the long-term sustainability of the pension system, to issues such as ensuring the independence of the state statistical agency ELSTAT, overhauling its civil justice system and increasing VAT on bread produced in bakeries.
When Greece is compared with other eurozone countries, it is clear that any definition of a growth strategy and investment agenda is subject to a set of economic conditions, institutional parameters and policy narratives that currently do not apply to any other member state.
Put otherwise, when the future of Greece’s membership of the euro is at stake, with capital controls in place and a working relationship with its eurozone peers defined by the need to rebuild trust from scratch, then any identification of growth perspectives for the real economy is marred by fundamental uncertainty.
The question of sovereign debt reduction for Greece – frequently also termed debt relief or debt restructuring (although they do not mean the same in terms of process and substance) – has turned into an increasingly divisive debate among the country’s international creditors.
The IMF’s debt sustainability analysis and the political economy conclusions resulting therefrom have created a policy conundrum for the European creditor institutions in the quartet. While the Washington-based lender continues to maintain its senior creditor status, it is asking the European official creditors to engage in a substantial debt reduction operation towards Greece in which the IMF itself will not participate.
It therefore does not come as a surprise that the Greek government is actively using the IMF’s line of argument in the arduous negotiations to push for greater debt reduction. It is equally no surprise that some European institutional creditors and various eurozone finance ministers are rather critical of such beggar-thy-neighbour policy recommendations issued by the IMF
The current debate on the sustainability of Greek debt has to focus more on the short-term repayment obligations in 2015 and 2016 to the IMF and the ECB than on the country’s overall debt-to-GDP ratio. More specifically, it is Greece’s immediately maturing debt profile, and not the total nominal amount, that matters most urgently at present.
However, this perspective should not obscure the fact that Greece’s accumulated debt is in effect unpayable. When Greece’s European official creditors will concede this uncomfortable truth and explain it to their respective parliaments and constituencies is a matter of acknowledging that they are no longer in denial.
In light of the economic developments and political uncertainties during the first half of 2015 in Greece, it is currently near impossible for the negotiating teams to make any medium-term predictions about the outlook for the country. The imprecise nature of current fiscal and macro-economic projections are having an effect on the identification of Greece’s funding needs by international creditors for the next three years.
The ongoing capital controls, which have been gradually fine-tuned for households and moderately revised for the corporate sector, further complicate the efforts to configure an accurate account of the state of play of Greek domestic lenders. Not until the recapitalisation and resolution process has been set in motion will we be in a position to know which of the four systemic Greek banks are still able to stand and open for business.
The big unknown issue for Greek banks, their bondholders and depositors concerns the mechanics of recapitalization. As of January 2016 the rules of the game change. Because of the emerging banking union architecture in Europe, new bail in regulations will apply.
The revised regime calls for eight percent of a bank’s balance sheet to be bailed in before (!) any public funds are committed towards bank recapitalisation. The rule change would affect insured depositors, i.e. private households and companies, in particular small- and medium-sized enterprises.
The material consequences of this change are also considerable for bondholders. Senior – and not only junior bondholders – would have to contribute to such a burden-sharing exercise. It is thus no wonder that senior National Bank of Greece bondholders have addressed their concerns in recent days.
Timing is therefore critical in the coming weeks and months. Everybody involved in the process has an interest in completing the process in the course of this year. The quartet wants an orderly conclusion of the negotiations. The Greek side may have an even greater incentive to conclude the proceedings on time.
*An earlier version of this article appeared in last week's e-newsletter, which is available to subscribers. You can find more information about our subscription packages here. You can follow Jens on Twitter: @Jens_Bastian
Playing with concepts of debt NPV is only understood by a few.
Here is what the Quadriga can do in practical terms (if it wants to help and not punish as many fear):
1. Set the Greek debt rate at below 1% so that the cumulative annual Greek debt service does not exceed 3 Billion euros. (Let's call it the 3 Bil. debt service ceiling).
2. Then Germany should be asked to stop scoring Greek annual trade deficits of more 4+ Bil. euros and instead do what the USA is doing with Greece, which is to accept temporary Greek trade surpluses vs. Germany up and until the Greek economy is in sound footing (let's say theoretically 5 years of Greek trade surpluses vs. Germany). Holland should also follow this scenario and allow for Greek trade surpluses also (Holland is another chronic trade abuser producing deep trade deficits to Greece precisely copying the German model).
"This perspective should not obscure the fact that Greece’s accumulated debt is in effect unpayable" - true; or perhaps not quite?
The principal question is who does the repaying? The most painless way for all parties concerned is always to have inflation and growth 'repay' the debt.
Just a theoretical exercise: current debt of about 320 BEUR represents, I understand, about 180% of GDP. If those 320 BEUR were put on a bullet maturity in 50 years with a zero interest rate, I guess by 2065 the debt would be far below 60% without Greece having had to pay a dime. If you move the bullet out to 75 years, the percentage gets so much better.
The key question really is: everything else being equal for Greece, would it not be smarter to allow the lenders to spread out their losses over 50-75 years instead of having to take them at once with all the political repercussions?