ECONOMY

Pegging reforms to debt relief acts

The government appears determined to walk the road of Portugal by tapping the markets to avoid a third bailout loan from the EU and even show the IMF the door. However, it may trip if talks between Prime Minister Antonis Samaras and German Chancellor Angela Merkel do not produce results on Tuesday. If market access is the answer to Greece’s funding needs, a compromise between the two on some politically sensitive reforms may be the answer to the completion of the troika’s assessment on time and the start of debt relief talks.

Finance Minister Gikas Hardouvelis could not have been any more specific about the intentions of the European Union and the International Monetary Fund with regard to Greece after the EU program concludes at the end of 2014 when he told Bloomberg: “The European program concludes at the end of the year. The IMF program ends in 2016. There is therefore a gap between the two programs. Both creditors feel uncomfortable about 2015, regarding what could happen… the IMF does not want to lend on its own, the Europeans feel annoyed having the IMF lending while they stay outside. There should therefore be a solution to that.”

If that’s the case, there are three possible outcomes.

First, the IMF stays on and Greece accepts a small, third bailout loan with some sort of conditionality from the EU to cheaply fund the projected financing gap in 2015 and possibly 2016. In this case, the EU and the IMF would continue to lend Greece till the end of the first quarter of 2016 when the IMF program ends.

Second, the EU program ends at the end of the year and the IMF exits around that time or in the first quarter of 2015 as well. This requires Greece to find the money to fill the 2015 financing gap and replace the IMF loans. These loans could come from the EFSF/ESM or the markets and any other source.

Third, the EU program ends in December and the IMF keeps on lending till the first quarter of 2016.

It is clear the Greek government prefers the second outcome for political and economic reasons. It thinks that, coupled with successful debt relief talks, such an outcome could boost its chances of electing a new Greek president in Parliament, extending the life of the government till June 2016, in hopes of capitalizing on an expected economic turnaround by then. It also believes markets will applaud it and with some extra help – i.e. Greece’s qualification for the European Central Bank’s Outright Monetary Transactions (OMT) program – will raise the money from the markets to replace the remaining IMF loans.

As far as the EU is concerned and judging from past statements made by high-level German government officials as well as Hardouvelis’s comment, it looks as if some countries would prefer Greece to get a small, third bailout loan to remain in step with the IMF. Obviously, they think this would give them more leverage over Greek economic policy decisions.

Some in Athens see the troika taking a tough stance on pending issues and the assessment dragging into next year to force the country to accept another bailout loan. If there is no agreement, Greece will not get over 7 billion euros from the EFSF, the Eurosystem and the IMF. More importantly from the government’s point of view, the debt relief talks will be delayed and the troika’s departure will not be made possible, paving the way for political developments.

So there appears to be some distance between the government’s desire to end the “MoU vs anti-MoU” domestic debate (which is damaging for it in terms of its popularity) by making sure Greece gets no more bailout loans and the troika walks out before the vote in Parliament takes place and the desire of some EU countries to retain some control.

Undoubtedly, the coalition government is in a difficult position. It will have to agree with the troika on a number of politically thorny issues to complete the current review of the program at a time when PASOK has made it clear it will not consent to some reforms (i.e. labor) and the conservative New Democracy party is clearly lagging behind left-wing SYRIZA in opinion polls.

Talks between Samaras and Merkel could help reduce the distance or may not lead anywhere. The premier will likely seek some flexibility to have the current review of the program completed on time and debt talks begin thereafter, while the chancellor will likely stick to her line about the importance of structural reforms. Could a compromise emerge? And, if so, what form could it take?

One idea is to leave out a couple of thorny issues and reach an agreement on the rest of the reforms so that the troika’s assessment is completed on time and talks do not drag on for several months like last year. However, the reforms left out of the review will be on the table during the debt talks. To ensure they are implemented, each reform may be assigned to a specific debt relief measure – i.e. the reduction in the spread of the EU bilateral loans. This will crystallize the cost of noncompliance and make it difficult for lawmakers to vote against it. It may not be perfect but it is a way for Greece and the EU to move on to the next phase.

It is difficult to predict the outcome of the talks between the premier and the chancellor. Linking debt relief measures to a couple of reforms left out of the troika’s current review may be the key to breaking a deadlock and ensuring the success of the Greek program. Time will tell.