The agreement reached at a mini EU summit with Greek Prime Minister Alexis Tsipras and other high-level EU officials, could mark the beginning of a more constructive engagement between the government and official lenders. This should become obvious in the next 10 days or so because failure to do so may bring about unpleasant consequences, including a credit crunch. Greece bought some time at the recent meeting but the clock is ticking.
The government has to present a full list of structural reforms to the lenders in the next few days, something that could have been done in previous weeks. The reforms will be evaluated and hopefully approved by the Eurogroup so that a portion of the 7.2 billion euros earmarked for Greece under the second adjustment program can be disbursed. Government officials are hopeful of smoother cooperation with the technocrats of the so-called Brussels Group, comprised of senior officials from the European Commission, the IMF, the ECB and the ESM (European Stability Fund), who are on a fact-finding mission in Athens.
However, third-party observers who are aware of the review process and the fundamental weaknesses of the Greek civil service are not that optimistic. Although communication between the two sides may be restored, helping reduce the frustration of the technical teams of the Brussels Group, the speed with which ministry officials and others can respond to queries about data remain a big question mark. Unless the Greek side has done some homework and is ready to deliver the figures requested, the observers say they would be surprised by a response in such a short period of time. If they are right, the review process will not be completed before we get well into April and Greece will not even be able to get the 1.9 billion euros it is hoping for from the return of income from bonds held by the ECB by then.
Politics aside, the observers also point out that the Greek side has underestimated the role of the technocrats involved in the review process. According to them, their role is not limited to mere fact-finding but extends to producing policy proposals sent to their superiors for approval or modifications if the Greek side objects. As far as we know, such engagement between the two sides has not taken place yet for fiscal and other data.
The observers, who have a knowledge of the negotiations, say the task is made harder by the fact that the Brussels Group members are working from their hotel, with the information they request being delivered there. Figures which could be made available in 20 or 40 minutes at the General Accounting Office could take longer if meetings take place elsewhere. Communication may slow down further if some of the Greek officials involved simply do not want to deal with the technocrats for ideological or other reasons and are forced to, they add.
The leftist-led government, which places a lot of emphasis on political marketing, could single out the lenders’ concession about relaxing this year’s primary surplus target and its own claim about the Greek ownership of reforms to advance talks with the lenders and please the domestic audience. Although dealing with the more radical members in SYRIZA’s party could be challenging, we think the appeal of the government to the people is more important as a political priority. Its popularity is more well-served by ensuring there will be no more austerity measures and keeping the country in the eurozone than by a collision with Greece’s EU partners and a credit crunch.
Therefore, the government should be encouraged to cooperate with the technocrats, come up with a complete list of reforms, including privatizations, and start implementing them. In this regard, plans to use the privatization proceeds to mainly cover the shortfall in the social security system or elsewhere instead of retiring public debt are perceived as a unilateral action by the lenders and should be revoked. The least Greece needs is to extend the negotiations with the Damocles’ Sword of a credit crunch hanging above its head and conditions in the real economy deteriorating.
We have no doubt that no one wants a Grexit for political, economic and geopolitical reasons. From an economic point of view Greece is a nuisance for the EU and it is not worth risking a Grexit for a few more billion euros. However, the country has to respect at least some of the rules of the game to make it possible for its eurozone partners to disburse some funds so it avoids either a credit event or a domestic moratorium on payments to civil servants, pensioners and others.
The current impasse in the negotiations is not a problem for the EU as long as it pays no or little fresh money to Greece. The ECB’s policy to allow small increases in the loans available to Greek banks via the Emergency Liquidity Assistance (ELA) mechanism speaks volumes. Therefore, the government should take advantage of the last window of opportunity created by Tsipras’s talks at the EU summit to advance negotiations with the lenders and secure some funding. Time is ticking and it is not on Greece’s side.