By Dimitris Kontogiannis
Greece may have to be blamed for unwillingness to comply and delays in the implementation of structural reforms agreed with its creditors, the European Union, the European Central Bank and the International Monetary Fund. However, it cannot be accused of not sticking to fiscal consolidation. On the contrary, the troika should be blamed for applying unnecessary economic pain by excluding refunds from eurozone central banks in meeting the budget deficit targets in the medium-term fiscal strategy plan.
The coalition government suffered a good deal of political damage in passing the unpopular omnibus bill, with the prime minister painting it as a landmark in the country’s quest to exit the crisis and return to growth. But his most appealing argument to a largely disillusioned public, namely that 90 percent of the 31.3-billion-euro loan tranche will stay in the country this time around and he will fight for more loans to be released, was cast in doubt shortly after by a statement from German Finance Minister Wolfgang Schaeuble, who pointed out it may be too early for the Eurogroup to make a decision on releasing the funds to Greece on Monday.
Schaeuble was frank in expressing reservations because he understood the importance of a factor the Greek side had downplayed by focusing on the negotiations between the government and the troika on the package of reforms and austerity and the parliamentary vote. This factor was the disagreement between the IMF and the EU on the sustainability of the Greek public debt and the prospect of more debt relief which also hindered the publication of the troika’s review. The Greek vote on the unpopular bill simply helped expose more the IMF-EU rift on providing Greece with more debt relief since the EU opposes haircuts on official loans and the ECB on Greek bonds bought in the past under the legacy SMP program favored by the IMF.
This was not the only misjudgment of the situation by the Greek side. By engaging in protracted negotiations with the troika on the austerity package and not concluding them much earlier, it failed to bring the disagreements between the IMF and the EU to the fore and put pressure on them to resolve them. By failing to come up with a comprehensive bill, detailing the terms of the recapitalization of Greek banks following the successful completion of the Private Sector Involvement in spring, it managed to make the 23-24 billion euros dependent on the troika’s review instead of the PSI bond losses.
However, Greece should not be solely blamed for making such mistakes and the lack of drive to overhaul the public sector and liberalize the economy. Its creditors also bear responsibility. The internal discord in the troika and the IMF-EU rift at the highest level have not helped.
Yet the creditors’ biggest mistake has been their dogmatic adherence to an excessive dose of austerity which has undermined the reform effort and the attainment of the budget deficit goals and put the country deeper into the debt trap by weakening the economy.
Perhaps nothing demonstrates this more clearly than the calculation of the so-called fiscal gap over the 2013-16 period in the medium-term fiscal strategy plan. The fiscal gap essentially determines the fiscal effort, namely the austerity measures, Greece has to take to fill it.
In estimating the fiscal gap, the troika does not include portfolio income from Greek bonds refunded by eurozone central banks via their national treasuries to Greece. Unlike the ECB, which does not participate, at least so far, national central banks in the Eurosystem have committed to refund portfolio income from their Greek bond portfolio to the country.
Unofficial estimates put the total amount to be refunded close to 3 billion euros in the 2012-16 period or over 2 billion between 2013-16. A good chunk of it, some 30 percent, is coming from the Bank of Greece.
Although this amount is included in the budget revenues, it is not taken into account in the midterm fiscal framework for 2013-16. This explains why the 2012 budget deficit of the general government is seen at 12.9 billion euros according to the 2013 budget but stands at 13.5 billion in the midterm plan. The troika may regard these revenues as one-off and thus does not want to include them.
It is understood the inclusion of the refunds in the calculations of the fiscal gap would have translated into fewer austerity measures to the tune of 2-3 billion euros over the 2013-16 period. This would have given the depressed Greek economy, operating well below capacity, some breathing space and give more social acceptance to the austerity package. This action could also be justified because these revenues may be regarded as one-off but spread over many years through 2020, albeit at a declining pace after 2016.
After undertaking and/or legislating austerity measures worth more than 30 percent of GDP since May 2010, one would have expected the troika and the country’s creditors in general to have learnt from their mistakes in applying an excessive dose of austerity to the Greek patient. However, the treatment of the investment income portfolio of the eurozone central banks received by Greece shows this is not the case. So it is not just the Greeks who make mistakes; it is also the troika and the creditors.