The Greek government and the country’s official lenders will soon have to find a compromise to end the deadlock in the ongoing negotiations and conclude the adjustment program. The use of the reserves of public funds, state-owned enterprises and others and the creation of a pile of arrears may have provided some respite but it is not a permanent solution to the country’s funding gap. A middle-ground solution could be found if the government delivers on some key reforms and the creditors allow other thorny issues to be included in a new bailout agreement down the road.
The Greek government’s negotiating tactics may have alienated it from some of its natural European Union allies and undermined their confidence in Greece, but they do have the approval of the majority of the public, according to opinion polls. This could encourage the government to follow the same path if no “honorable compromise” is reached, meaning if the reforms go against leftist SYRIZA’s policy program. But a number of structural reforms demanded by the creditors in areas such as pensions, the labor market and even privatizations run against the long-held beliefs of hardcore leftists in the administration and the ruling SYRIZA party.
This creates a gap between the government and the lenders which will be difficult to bridge since some of these reforms may be voted down by the ruling majority in the 300-seat Parliament. SYRIZA holds 149 seats and its junior partner, the right-wing, populist Independent Greeks (ANEL), another 13 seats. The scenarios about holding a referendum on the proposed measures or new elections in hope Prime Minister Alexis Tsipras cements his power over the party and even wins an outright majority emanate from this realization.
More and more outsiders sense the distance separating the two sides is still large although Greek government officials have been more upbeat in their assessment of the current state of negotiations. On the other side, the lenders have been much more reserved and rather pessimistic, it has to be said. So the question is: Could the gap be bridged in the next few days to have at least an agreement in principle on April 24 when the eurozone finance ministers meet in Riga, Latvia?
It’s hard to say, although the chances of a compromise on all pending issues do not look good at this point. There may be an agreement on a technical level on the fiscal side if, as believed, the lenders are ready to accept some sort of fiscal easing this year. However, it may be almost impossible on other reforms such as the rules governing mass layoffs, problematic bank loans and the no-deficit clause for the supplementary pension funds.
There is no doubt Greece is under increasing pressure to pay wages and pensions on the one hand and service its debt on the other. To do so, it has put off payments to suppliers and others. In private, government officials say it is hard to find all the money to pay civil servants and pensioners at the end of April and pay back 200 million euros in interest to the IMF on May 1 as well. Even if this is made possible, the same officials say the chances of making all payments next month is close to impossible. The country will have to repay 767 million euros to the IMF on May 12. Some of the lenders take a more cautious stance, claiming Greek officials have made similar claims in the past but the country was able to make it then. Of course this would have been impossible had the state not tapped the cash reserves of some general government entities, allowed some arrears to pile up and had revenues not exceeded primary expenditures.
Less than a month ago, Morgan Stanley published a report outlining three scenarios for Greece. The first scenario of a “euro stay” would be the result of political compromise. “Basically, of the ‘impossible trinity’ that SYRIZA wants (stay in the euro; be in power; undo the bailout program), what gives is that the Greek government doesn’t undo the bailout program,” it wrote. The analysts expected the administration to recommit to implementing a slightly less demanding package of measures in agreement with the official lenders.
The second scenario of a “euro staycation” predicted that no compromise would be reached in the next three to six months. This could lead to financial stress and the imposition of capital controls to limit money outflows. The state could also issue IOUs to cover part of its expenses, introducing de facto a dual currency, circulating domestically. In this scenario, the end game is either euro stay or exit in the medium term. The third and least likely scenario was the euro exit.
At this point, the first, baseline scenario continues to be the dominant one but seems to have ceded more ground to Morgan Stanley’s second scenario. It is therefore high time the government departed from some of its election campaign promises to meet the lenders’ demands on the fiscal side, privatizations and pension reform. For their part, the creditors should provide some financing along with fiscal easing and accept that other thorny issues be addressed in a new bailout agreement down the road. This way both sides can buy more time to work out the details and the government will be able to work on its domestic political strategy and prepare the ground for a grand compromise in the summer. Failure to do so could put in motion economic and political forces that will be difficult to contain.