The week after Parliament voted in favor of the so-called midterm agreement finds all the players in a difficult position: The Greek government because it is compelled to implement a raft of austerity measures and reforms that it does not want to (or believe in), and the country?s European creditors, who need to find the cash for the fifth tranche of assistance to the debt-ridden country, which they really don?t want to provide. The unlocking of the 12-million-euro tranche of the rescue fund was approved by the Eurogroup over the weekend, yet there is still a good deal of anxiety over the second bailout, which is expected to be decided on by July 11 at best or by September at worst after the eurozone governments and European banks decide on who will pay what.
Whether and how the money will be dispensed is an issue that is much more complicated than it sounds, which is why experts from the European Central Bank, European Commission and the International Monetary Fund — collectively known as the troika — have been having to make such frequent visits to Athens, and are due again at the end of July to see how the government has been getting on.
As far as the Greek government is concerned, the main issues are the following:
1. It needs to implement fiscal measures that will yield an estimated 6.7 billion euros in under six months. The tight time frame alone is reason for serious uncertainty. Announcing new taxes will not make any difference unless they are paid promptly and in full (given the magnitude of tax evasion in Greece). Currently, the tax collection mechanism is already behind with the collection of the ETAK property tax imposed for 2009 and with tax returns for 2010. The threat of the austerity program becoming derailed because of weaknesses in the political leadership and in public administration is very real.
Other than aiming to raise 2 billion euros in tax hikes this year, the midterm plan also foresees the closure or merger of public organizations and institutions, a move that is estimated to save the state 540 million euros by the end of 2011. Social insurance funds, meanwhile, need to trim their expenditures and benefits by a total of 1.2 billion euros, while also increasing their revenues by 629 million euros.
2. The government needs to move ahead immediately with very thorny legislation, such as an across-the-board salary structure for the civil service and cutbacks in social benefits that are certain to bring it into serious conflict with the hard core of its voter base in the country?s labor movement.
3. The privatization of state assets is a key requirement in the midterm agreement with the troika. Finance Minister Evangelos Venizelos has already received a letter from the troika demanding that the so-called Privatization Fund be up and running within the next fortnight, so that it is ready to begin registering those state assets that are listed on the stock exchange and those that are not, and then to draw up a time line for their sale.
For the eurozone?s part, meanwhile, governments need to balance their own political aspirations with the economic interests of their own countries and of the bloc when it comes to designing the bailout for Greece. The facts are:
1. Greece needs a total of 172 billion euros from mid-2011 to the end of 2014. Of this, 57 billion will come from the existing bailout package and another 30 billion will come from privatizations. The remaining 85-90 billion must be shared between the eurozone governments, the International Monetary Fund and private banks.
2. The contribution of banks cannot be considered a credit event.
The French plan to roll over Greek debt is a strong basis for negotiations, though it will have to undergo significant changes if the banks are to agree. The banks want an overall solution to be found to the Greek problem, rather than a temporary reprieve from its borrowing needs. A plan from the International Institute of Finance proposes a reduction in interest rates on Greek bonds and larger guarantees, but mainly a program for the buyout of Greek debt by a European body founded especially for this purpose, at current low valuations, which will lead to an indirect haircut.