By Dimitris Kontogiannis
The private sector will once again pay the biggest price for the likely delay in the disbursement of the next loan tranche to Greece as negotiations between the government and the troika on the new austerity package drag on, global considerations, such as the elections in the United States, seem to have come into play and failure to implement various reforms weigh in.
Despite reported “good progress” in discussions between the troika and the Greek side on the new austerity package worth some 13.5 billion euros -- split approximately between 11.5 billion in spending cuts and 2 billion in tax revenues -- and the clear intention of Finance Minister Yannis Stournaras to conclude the negotiations by last night, there was no happy ending.
The delay has upset the sketchy timetable some local politicians and government officials had in mind. The latter hoped to have the measures passed through Parliament in the last week of September at the latest, giving the troika time to present its report to the Eurogroup meeting on October 8.
The Greek side obviously counted on an overall positive troika review of the economic program, following the adoption of the austerity measures, so it could convince EU finance ministers to give the green light for the disbursement of the 31.5-billion-euro tranche to the cash-strapped country. Moreover, it could also have presented its case for a two-year fiscal extension to the EU Summit in mid-October.
Whether the delay fits presumed EU plans to give the coalition government more time to implement reforms so that the governments of northern countries -- especially Germany -- can justify the extension of the Greek fiscal adjustment to their constituencies, or/and is mainly due to a desire by the US side for no unpleasant surprises prior to the November 6 elections remains to be seen.
At first glance, both arguments have some merit and may not be mutually exclusive. Greece failed to implement a number of reforms in the first half of the year, such as lifting barriers to entry in some regulated professions, partly due to the extended election period. This explains the delay of the disbursement of the 31.5-billion-euro tranche, which was supposed to be paid by end-June, as policy implementation lags are met by delays in the disbursement of official loans.
Moreover, the EU and the IMF appear to have different views on the sustainability of the Greek public debt at this point and may need more time to reconcile them. Even if they do so, making it public that the debt ratio is projected to come to above 120 percent of GDP in 2020 could unsettle world markets and this is not what the US’s Barack Obama administration would like to see ahead of the elections.
In addition, there is no reason for the troika to publicize the Debt Sustainability Analysis (DSA) of the Greek debt if Greece is to request an extension of its fiscal program and perhaps get it at the EU summit on October 18. After all, an extension is bound to create a funding gap and affect the trajectory of the public debt-to-GDP ratio.
This in turn means that sources of funds have to be identified to fill the gap and steps have to be taken to bring down the debt ratio below 120 percent of GDP by 2020 since this is important for keeping the IMF aboard.
Since it is almost certain that Prime Minister Antonis Samaras will ask for two more years to bring the budget deficit below 3 percent of GDP in 2016 at the EU summit, the troika should find technocratic ways to justify a delay in writing its report on Greece . Also, this would probably suit political leaders in the European Union, especially if the Greek side manages to implement more reforms and they can justify their agreement to the extension to their constituencies back home.
There is a strong case for the troika to finalize its review report later than initially thought, perhaps after the US elections, though this would mean a delay in the disbursement of the funds to Greece, possibly to the second half of November.
However, this ongoing saga is a bane on the Greek economy and more specifically the private sector, its engine. Although the execution of the budget is going well and the country may not need more money from international lenders to pay pensions and wages in the public sector, the state will delay the settlement of arrears domestically and may even increase them by declining to pay suppliers and others in the private sector. It is reminded that about 4 billion euros from bailout loans were destined to settle domestic arrears and inject liquidity into the cash-starved real economy by the end of this year.
The delay would also bring back any plans for the recapitalization of Greek banks, as some 23.5-23.8 billion euros of the 31.5 billion euros are destined for bank recapitalization and the facilitation of resolutions in the sector.
A delay may be good for those who wish the status quo to be preserved but it is ominous for the economy. This is because local banks are subject to liquidity and capital constraints operating in a bad domestic macroeconomic environment with increasing bad loans and deposit outflows at least till last June. Although deleveraging is the norm in periods of scarce liquidity and protracted recession, recapitalization is widely regarded as key to restoring depositors’ confidence in banks and the gradual return to credit extension. This cannot happen without bailout funds at a time when few private investors will risk their money when uncertainty over Greece ’s future in the eurozone persists.