Gov’t must settle for tough measures

The moment of truth for Greece and its lenders is getting closer as the current program expires at the end of June and the country has to repay 1.6 billion euros to the IMF. It is clear the government will have to accept some painful measures to clinch a deal.

At this point, a thorough agreement, an extension of the program, following the implementation of some reforms, and a default are the main options. It is a tough call but an extension of the program looks more realistic than the others. In any case, political developments may ensue, whatever the outcome.

Greece’s European partners and the IMF are getting impatient with the government as it tries to strike a balance between the demands of the lenders and the hardliners in the ruling SYRIZA leftist party. At the same time, everybody realizes the stakes are very high as a default could potentially lead to Grexit, calling into question the irreversibility of the euro. Even if there was no exit from the eurozone, the cost of a default would be very high for the country and its impact felt for quite some time. Therefore, some kind of agreement should be the natural outcome of the deliberations with the weak, Greek side, making most concessions.

Just how precarious the situation has become was made clear once again last Wednesday when the European Central Bank (ECB) reportedly approved a 2.3-billion-euro increase in the ELA (Emergency Liquidity Assistance) facility for Greek banks. The upper limit for ELA loans stands at 83 billion euros, on increasing deposit outflows the week before. Analysts estimate 43 billion euros of deposits, or 23 percent of the total, have been withdrawn from banks since the end of last November. It is likely the ECB will freeze the ELA if Greece does not reach a deal with its creditors by the end of this month or even earlier. In turn, this could lead to capital controls. This provided a major incentive to the government to clinch an agreement with the Eurogroup back in February and could be repeated this time as well.

High-level government officials were expected to present a new counter-proposals to the chief auditors of the European Commission, the ECB and the IMF on Saturday. But a non-paper issued a day earlier highlighted the differences between the government and the lenders. It clearly shows that the Greek side has a different approach.

The government apparently thinks the IMF’s decision to withdraw its technical team from the negotiations in Brussels after days of inaction was intended to put pressure on Greece, the European Commission and the ECB to reach a deal and return the negotiations at the technical level.

Moreover, the IMF is seen exerting pressure on all sides, especially Berlin, to impose tough policies on Greece so it gets its money back. From the Greek side’s point of view, the IMF’s stance also stresses the internal differences between the three institutions. Still, the three institutions ironed out their differences in their joint proposal discussed by Greek Prime Minister Alexis Tsipras and European Commission President Jean-Paul Juncker.

In the same non-paper, the Greek government tried to counter the arguments made by IMF representative Gerry Rice earlier, highlighting a few points with regard to the pension system, a major thorny issue. It said that the average monthly pension in Greece is 664.69 euros for the main ones and 168.40 euros for the supplementary pensions. According to the authors of the non-paper, 44.8 percent of pensioners, that is, 1,189,396 out of a total of 2,654,784, receive a monthly pension that is lower than the poverty line of 665 euros. It also pointed out the average monthly pensions in Greece and Germany are about the same.

The non-paper also tried to play down the differences between Greece and Germany as far as the average age of retirement is concerned, arguing they are small in a bid to show the IMF was tough on the country. It said the retirement age is the same for men at 63 years old in both countries, but admitted that while German women retire at 62 years old on average, Greek women receive a pension at 59.

It is easy to see why the government is making this comparison. It wants to show that the IMF’s demands for a drastic reform of the pensions system are excessive. However, the German economy has little or none in common with the Greek economy which is burdened by a huge public debt, exceeding 170 percent of GDP, has a small export base and is not internationally competitive.

We think the government may have to adjust its position as far as the reform of the pension system is concerned to reach a deal. Even so, there is not much time left for the kind of thorough deal it wanted, encompassing debt restructuring and a major investment program to boost growth. Instead, it will have to settle for tough fiscal measures to attain a primary budget target of 1 percent of GDP this year, proceed with some privatizations and some reforms in pensions and the labor market. This points to an agreement similar to that presented by the lenders last time with the carrot of disbursing some bailout funds for Greece to pay off its huge liabilities during the summer – essentially, a new extension.

This is a bitter pill for many SYRIZA hardliners to swallow and we would be surprised if such a deal did not lead to political developments, even if Tsipras managed to get the bill through Parliament. This is because the implementation of the deal will prove much harder down the road.