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EU's bitter medicine won't cure Greek ills

Aug 13. 2015
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By Jonathan Eyal
The Straits Tim

Greece's parliament convened yesterday to debate the terms of the country's latest financial bailout deal with the European Union.
Prime Minister Alexis Tsipras, who came to power early this year demanding an end to such bailouts, is now advocating approval for a bundle of loans which he claims “are the best Greece could have obtained”, and represent “the only way” of averting bankruptcy and the country’s eviction from the euro zone.
But the package, which “can amount to €86 billion” (Bt3.36  trillion) of fresh European credits over three years as the text of the deal claims, is still vague on some key demands Greece has to comply with.
And political support for the adoption of the bailout agreement remains fragile, not only in Greece itself but also among the country’s European creditors.
Greek negotiators boast that they have succeeded in persuading EU governments to reduce the tough fiscal targets imposed on the country during two previous bailout packages.
So, instead of having to produce a primary surplus – more government revenues than spending before the money due for debt repayment is factored in – equivalent to 3 per cent of Greece’s gross domestic product this year, Athens will be allowed to actually run a deficit of 0.25 per cent, and will be expected to produce a primary surplus of only 0.5 per cent of GDP next year, rising to a still modest 1.5 per cent surplus in 2017.
That means Tsipras can spend more than he raises in taxes this year, and does not need to cut spending as drastically as originally intended for the next two years.
But Greeks are still expected to produce a very tough primary surplus of 3.5 per cent of GDP by 2018, so the crunch point is merely postponed.
Meanwhile, the government is still expected to apply 35 new “urgent measures”, including cuts in pensions, a rise in sales tax and slashing the civil service payroll.
Greek negotiators have also not succeeded in getting agreement to write off some of the country’s total debt which, at ¤330 billion, is about 180 per cent of the country’s economy, a figure which the International Monetary Fund now accepts is not sustainable.
But Germany, which claims that debt forgiveness is illegal under EU treaties, has merely agreed to discuss the question again in the future.
Uncertainty also surrounds the fate of the country’s banks, most of which need to be recapitalised, “since they no longer fulfil their role to finance enterprises and households,” says Dr Nikolaos Georgikopoulos, an expert on the Greek economy who is now based at the Stern School of Business in New York.
The snag is that nobody knows how big the problem is; estimates done by some economists suggest that up to 45 per cent of all the loans on the Greek banks’ books are “non-performing”, a more polite way of saying that they are unlikely to be repaid.
One way of dealing with the problem is to impose a “haircut” – a loss – on bank depositors, something that will hit Greek corporations and business hard.
The only other option is that Greece gets yet another loan to recapitalise its banks.
But under current regulations that will also require the imposition of a haircut on depositors, and will add an estimated ¤25 billion of extra government debt.
Unsurprisingly, therefore, the problem of Greece’s financial institutions remains unresolved.
Yet the biggest difficulty is political. Having urged his fellow Greeks to vote “no” to a previous bailout package in a referendum last month, Tsipras finds it difficult to argue for the adoption of a much tougher EU package now.
Some of the ruling Syriza party’s leftist MPs are pledged to vote against the bailout proposals, and although Tsipras can rely on opposition votes to push the deal through, the consensus is that, if fewer than 121 of Syriza’s 149 MPs support the bailout when the vote is held tonight, the government will be doomed, and new general elections will have to be held.
As ever, time is not on Greece’s side. Euro zone finance ministers are scheduled to give their final nod on the deal today, provided the Greek Parliament had given its consent.
Any delay will make it impossible for Greece to honour a 3.2 billion euros debt repayment due to the European Central Bank due next week.
And the longer the saga drags on, the higher the chance that Germany will revive its suggestion that Greece should “temporarily” leave the euro zone.
It is this fear which may ultimately persuade Greece to accept the bitter medicine it is being administered, although nobody believes this will solve its problems.

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