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Greece Supported Its Words with Deeds but Caused a Discord between EU and IMF

Published on , , Zagreb

Greece is doing very well, but still a lot remains to be done, while the desire for compromises with the country seems depleted. This is one way to summarise the outcome of the very much expected meeting of the eurozone finance ministers (the Eurogroup) on November 12th. As usually happens in the Greek saga, in the days before the meeting the expectations were strongly pumped in, but literally hours before it cooling began. Thus it came to the amazing synchronous of the finance ministers, who on their way in the building of the Council in Brussels repeated before media one and the same thing - Greece has done a lot, it has achieved remarkable progress, but we can hardly expect a decision today (November 12th) on whether the country can receive the next tranche of 31.5 billion euros of the rescue programme.

The outcome of the meeting fully fits the expectations and the main reason for this is the lack of the debt sustainability report for Greece, which matters when determining the country's financial needs in the upcoming years. It was debt that was the reason for a public discord between the Eurogroup chief, Jean-Claude Juncker, and IMF Director Christine Lagarde. The so called sustainability of the Greek debt is the foundation of all previous efforts of the EU and the IMF to rescue Greece from default, therefore the eurozone. When the second adjustment programme was being agreed, the expertise showed that reaching a 120% of GDP debt level by 2020 is the unit of measure for debt sustainability after the "haircut" of the private creditors with over 50%. Back then, there were counter expertises, showing that this target could be very difficult to reach, although the Troika (the representatives of the ECB, EC and IMF) radiated optimism.

After the elections in June in Greece, the new government started to insist on a time extension of two years (and around 15 billion euros) to be able to fulfil all the conditions put forward by the international creditors in order to secure the life-giving financial injections on a regular basis. Prime Minister Antonis Samaras made several diplomatic shuttles in key European capitals to ask for the extension. At this stage, it is early to say whether the country will receive more money until the debt sustainability report is out, but the extension proved to be the point of conflict. During a news conference late on Monday evening after the meeting, Jean-Claude Juncker, the Eurogroup chief and a prime minister of Luxembourg, threw the news in his typical way of doing it surprisingly. Responding to a question by a journalist, he totally by the way and with a muted voice said that 120% still was the target but "there is a growing possibility the deadline to move from 2020 to 2022", as euinside predicted some time ago. This caused confusion in the room and many colleagues started to insist Juncker to repeat his words clearly.

But Ms Lagarde said that for the IMF the appropriate time frame was 120% by 2020. "We definitely differ on that, but what is important in the end of the day is debt sustainability", she added. Moreover, Jean-Claude Juncker announced that a "haircut" of the official creditors, the so called OSI, was very unlikely - an issue very highly discussed in the past few weeks. Christine Lagarde, however, pointed out that all avenues were being discussed, confirmed by Mr Juncker as well. Earlier this year, a decision has been taken to reduce the Greek debt to private creditors by over 50%, - one of the toughest episodes in the Greek drama - which is why it was supported by a promise that this would be a single operation, valid only for Greece. Back then, a "haircut" was discussed of the official sector as well (public institutions), including of the ECB, which however cannot take part in such an operation because this would constitute assistance to the country forbidden by law.

If nothing changes after the publication of the debt sustainability report, Greece will remain with the old commitments - reduce the debt burden to 120% by 2020, without any additional haircuts of the debt to the official creditors. A compromise with Greece will not be made even in terms of another deadline, approaching for the country - Friday, November 16th when Athens has to pay back 3.5 billion euros in the form of T-bills. The approach of this deadline was one of the major factors for raising the expectations before the Eurogroup meeting, although even if a decision was taken, it should have been approved by the eurozone national parliaments, which German Finance Minister Wolfgang Schäuble did not miss to mention after the meeting, recalling that this was done for all countries with programmes.

Olli Rehn, the monetary affairs commissioner, assured that Greece would not default on Friday because there were ways to collect the money. According to him, Greek banks have collateral that can help them take part in the auction on Friday. Compared to August, when these T-bills were issued, deposits in Greek banks have increased thanks to the recovery of stability after the June elections, Mr Rehn explained.

The future of Greece

Up to the beginning of the Eurogroup meeting on Monday afternoon, there were serious fears that it might fail because the Troika report was not complete. After all, the ministers were provided with a draft of the report, published in The Financial Times, which has blank pages left for the debt sustainability report and the recommendations. The report is over 100 pages, but its short resume causes mixed feelings, which is not in line with the eurozone attempts to create an image of a changing to the better Greece. If until recently the main accusations to Greece were that it made commitments only in words, Commissioner Olli Rehn said that "words were supported by deeds", especially after the adoption by the Greek parliament of two key documents - on November 7th the structural reforms package and on November 11th the country's budget for the next year, which plans to make 13 billion euros worth spending cuts. Mr Rehn called on all those who "deny the potential of the adjustment programme" to rethink the achievements of Greece, which he listed in three points.

First, Greece had managed to reduce public spending by some 25% for healthcare this year, thanks to the reforms in the sector to prevent fraud. The country now has one of the most modern systems for e-prescriptions in Europe, the economic affairs commissioner added. Second is the pension reform which led to an increase of retirement age to 67 years and its linking with life expectancy. The labour market reforms, where the unit labour costs have dropped by almost 15%, were the third point Olli Rehn outlined. Although, she was with the most positive attitude before the meeting, the IMF chief, Christine Lagarde, was much more cautious than the usually most conservative participant in such meetings Olli Rehn. She welcomed the voted last week two packages, but pointed out that the budget law was over a hundred pages which had to be carefully studied in order to see whether all measures were included in it.

She believes there are a few, "really a few" priorities that need to be added to ensure that the entire set of priorities is adopted. She again underscored what was important for the IMF - fiscal measures, structural reforms and debt sustainability analysis.

Probably the reasons behind Ms Lagarde's cautiousness (she said before the meeting that Greece had done an awful lot of work and "now it's time the creditors to do the same") are some of the conclusions in the draft report of the Troika. It notes that for many of the key measures in the second adjustment programme there were very large delays. "While for most of them are nevertheless expected to be completed before end-2012, and progress made so far suggests that this is feasible, provided determined efforts are pursued, a significant number of measures identified in March still needs to be delivered", the draft says, where it is also underlined that only full implementation and full commitment will be rewarded, which is another proof that the desire for compromise with Greece is fully depleted.

Regarding the structural reforms, which the IMF very much insists on, performance is mixed, the report says. The planned review of the social programmes and public administration has been delayed. The reduction of healthcare spending, which Olli Rehn outlined as point number one in Greece's achievements, have really delivered, the report says, but "some components have faced strong resistance from vested interests".

Disappointing progress is registered with privatisation, which is a major element as in the first bailout of Greece, but in the second as well, as a source of own revenues for the Greek budget. According to the document, the expected revenues by December 2012 will be only 1.7 billion euros. Next year, the revenues from privatisation are forecast not to be much higher than this year's - 3.4 billion euros, which are expected to reach 10.4 billion in 2016. The main problem the report outlines, however, is "doubts on the effectiveness of the governance of the privatisation process however continue to persist, which calls for setting better incentives in delivering higher proceeds, while contributing to better industry practises, more investment and net job creation".

And if the above mentioned achievements really cause mixed feelings, the risks highlighted in the report are sobering. "Risks to the programme remain very large", is the forecast of the Troika. The biggest risk stems from the fragility of the government which, although fully determined to complete the reforms, is subjected to severe political resistance. "A return to sustained growth can only be achieved when the structural reform agenda is fully and swiftly implemented. This will require breaking the resistance of vested interests and the prevailing rent-seeking mentality of powerful pressure groups", is said in the resume of the report.

The Eurogroup will gather for an extraordinary meeting on November 20th to review the debt sustainability report for the Greek debt and to decide whether the next tranche from the adjustment programme should be released. So far, the loans provided to Greece amount to 148.6 billion euros. Of it, 73 billion were paid under the first rescue programme for Greece, of which 52.9 billion by the eurozone member states and 20 billion by the IMF. Under the second bailout programme, Greece had received so far 75.6 billion euros from the eurozone rescue funds, fuelled again with money from the member states and the IMF.

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