The government doesn’t share the ideological underpinnings of the requested austerity measures
Peter Vanden Houte
August 14, 2015: It seems as if a deal on a third bail-out package (€86 bn over the next three years) between the Greek government and representatives from the IMF, the European Commission, the ECB and the ESM has been reached, although some outstanding issues remain. The agreement foresees a primary deficit of 0.25% of GDP this year. In 2016, Greece should post a surplus of 0.5% of GDP, 1.75% in 2017 and 3.5% in 2018. This takes into account a GDP contraction of between 2.1% and 2.3% this year, 0.5% next year, while 2017 should see the economy expanding again by 2.3%. If anything, these forecasts seem to be on the higher end of expectations.
The Greek newspaper Kathimerini mentioned that in the draft deal 35 prior actions were stated that the government should implement before any money can be disbursed. It includes a review of the social welfare system, phasing out early retirement, reform of the favourable tax treatment for the islands, product market reforms as proposed by the OECD, deregulation of the energy market and a change in the taxation of shipping firms.
As Greece has to repay the ECB on August 20, the country hopes to receive the first bail-out money before that date. That needs a speedy approval of the deal. A meeting of the Eurozone finance ministers should then approve the new package.
Germany also needs parliamentary approval of the agreement. Although Angela Merkel was not keen to accept a hastily concocted package and signaled she would have preferred a new bridge loan to allow for more time to put together a bail-out program, we don’t believe that the country will oppose the agreement.
A more thorny issue is debt relief. Germany wants the IMF to participate in the program, but the IMF is unwilling to do so, unless there is some debt relief for Greece. While most European countries oppose a haircut on official loans, there is still some scope to alleviate the debt burden by lengthening maturities and reducing interest rates. However, it remains unlikely that the European creditors will agree on upfront debt restructuring. That might only come after the first review of the new program, probably near the turn of the year.
The good news is that Greece has given up its confrontational strategy and seems to be willing to collaborate with its creditors to avoid “Grexit”. However, the economic situation has strongly deteriorated over the last eight months, making the fiscal consolidation still quite a challenge in a country that is tired of austerity. And the complete structural overhaul of the Greek economy the creditors are imposing seems a Herculean task for a government that doesn’t necessarily share the ideological underpinnings of the requested measures.
Peter Vanden Houte is an analyst with ING