The Elena Panaritis Show has been cancelled…is future syndication possible?

Greece is now casting around for a new Representative to the IMF (Executive Director) following the announcement June 1 that former nominee Elena Panaritis is withdrawing her candidacy for the position after a weekend of intensely negative reaction in SYRIZA’s ranks. From a statement she issued Monday: “I did not ask for this position and given that I accepted it only because I felt that I could help the government with my experience of how the IMF works, it is impossible for me to accept the appointment when there is a negative reaction from SYRIZA MPs and members.”

Just a few points need to be made.  Ms. Panaritis was clearly one of Greece’s most qualified potential candidates for this slot. Her knowledge of that rare dialect spoken at International Financial Institutions such as the World Bank and IMF was unmatched.  If another dozen Greek citizens could be found with expertise at roughly equivalent levels, they would likely have served in those institutions previously. It is doubtful other candidates would have had anything close to her wide background in structural reform issues.

So why was such a knowledgeable and media-savvy candidate a problem for so many in SYRIZA?  First, as a World Bank economist notably having led property rights reform in Peru, she could speak the language of reform, not the language of “reform rollback” that most SYRIZA officials sincerely believe they are elected to oversee.   So she was instantly in conflict with the core values of the government she would have been sent to represent. Second, as a nominee of Finance Minister Varoufakis, she was automatically suspect by all those who mistrust him.  Finally, as an economist who had served both the current SYRIZA government (most recently in the Brussels Group) and in George Papandreou’s government (MP at-large), she was clearly seen as an outsider (similar to Varoufakis) and probably fatally, as a “Memorandum supporter.”  Clearly, “structural reform” remains a dirty word in Greece, unless spoken in that special Syrizan-dialect that does not include the words “cutback,” “performance” or “fiscal restraint.”

This turn of events also further indicates the dysfunction of SYRIZA as a cohesive political party.  Cobbled together from a myriad set of alliances, smaller political Marxist-oriented parties, and disaffected Socialists, SYRIZA was only recently judicially recognized to have standing in national elections as a political party.  In coming to terms with SYRIZA, one must understand that this is a political party that is unable to speak with one voice.

How to ‘Tsipras-Proof’ Greece’s reform program and its accomplishments

 

With Greece’s elections upon us and the spectre of “the day after” ever closer, the team at Reform Watch Greece (RWG), clearly no supporters of the reform record of the current government, has reconvened to lay out a few of its ideas.  As the title of this note suggests, RWG believes the path of structural reform more or less laid out by the Troika offers one of the few workable paths forward for Greece at this time.  Of course a reform plan developed here in country and agreed by the population would be far more acceptable, but for reasons specific to Greece which could fill several articles, this kind of program or consensus hasn’t emerged.  But the lack of a Greek alternative is no reason to reject other reform programs.

We produced these ideas because we want to make it clear that no matter who wins the January 25 elections, we believe that softening the Troika’s positions on the core elements of the Greek reform program would be a major tragedy for this country.  There is no question that the majority of Greeks want the country to remain in the Eurozone; our view is that the election will show what percentage of the population is willing to support a risky attempt to cut a better deal, which implies increased external financial support for Greece in some mode but doesn’t answer many other questions about how funds would be found.  Domestically, that essentially translates into reducing taxes (see below) and otherwise accelerating the pace of visible improvements in the Greek populace’s daily lives, because in essence many haven’t seen any change flowing from structural reform other than a spate of new taxes in the last 24-36 months, which have allowed for Greece’s dramatic fiscal consolidation.   As this leaves most Greek families in a state of slow decapitalization with no clear upside, it is not surprising that a sense of desperation has fed radical politics/reform fatigue and boosted the acceptance of radical solutions here.

This note is not intended as a full playbook, but here are several of the key policy parameters Greece’s negotiating partners should expect to encounter:

1. Zero Reform Rollback (ZRR): This is the bottom line. What Greece actually needs is reform acceleration to make up for lost time since the great pre-Euro-election slowdown in early 2014. It is clear that a SYRIZA single-party government would attempt to move immediately and unilaterally to consolidate its popularity/political base through enacting legislation to reverse certain reforms already in place, along with the associated chest-thumping about the “powerless” Troika paymasters. A coalition government would need time to agree on a platform; accordingly such action would be much slower in that scenario. If market signals and domestic cash flow constraints aren’t enough to bring moderation to the new leaders, the Eurogroup and Greece’s allies need to make it clear that any attempt to roll back Troika-initiated reforms or refloat Greece’s public sector will trigger immediate sanctions and jeopardize discussions on both Greece’s debt as well as prospects for closing out/extending the current Troika bailout program. Because of the mixed messages coming from Europe up to now, SYRIZA officials continue to talk confidently to domestic audiences as though Greece’s partners are merely bluffing and have acquiesced to the inevitable. While some of this is show it appears to many as if this is the final SYRIZA position.
2. It’s Amateur Hour: Greece’s interlocutors will immediately notice a different calibre of politician in the mix. Although many key SYRIZA officers have credible (although not world-class) academic credentials, by and large the new team does not have corporate board/private sector experience or previous international financial institution assignments. Without this depth of experience, a SYRIZA-led Greek government team will immediately be shown to be at a disadvantage in international negotiations, and out of necessity extremely cautious in moving discussions forward. Although good at spinning the Greek press, the long-winded academic approach of the SYRIZA economic advisers that we that have seen to-date might well put the focused western negotiators or the journalists they encounter to sleep.
3. Undeniable Debt Unsustainability (UDU) is the new dogma: There can be no discussion of Greece’s economic situation with a SYRIZA official without the subject of “Greece’s unsustainable debt” being broached in the first minute. A lecture on Europe’s “immorality” in lending to Greece will follow shortly. The party essentially has no unifying core ideology beyond the demand for an upfront write-down of Greece’s debt, although as of late it seems an election-period decision has been taken not to demand such a write-off for Greek debts owed to the IMF or ECB (which would never even allow the subject to be raised). Accordingly there is still no room in SYRIZA’s thinking for maturity extensions, longer grace periods, long-term interest rate cuts and the like on the debts Greece now owes to its Eurozone partners – mostly channelled to the so-called Greek Loan Facility (GLF) and the EFSF (approximately 197 billion Euros). The Greek side will talk tough in public while quietly approaching its partners and explaining the “humanitarian emergency” facing the country. Accepting that Greece’s debt can be engineered onto a sustainable trajectory when combined with continued growth-catalysing structural reform — without the demanded write-down — may be the ultimate result of a prolonged negotiation with the Troika, but it will cost SYRIZA its ideological core. However, once it is made clear to the SYRIZA policy team that insisting on its preferred alternative (an upfront write-down) to this is financial disaster for Greece, we have no doubt an arrangement can be made. Be prepared for intense maneuvering: the Greek side will work furiously to exploit every signal from Eurozone member states and elsewhere that appears to indicate there might be the slightest flexibility on the matter.
4. Privatization efforts cannot remain frozen in time: We continue to believe the privatization program will be the major channel for foreign investment into Greece for the next years. Although many if not most Greeks would prefer to side-line the issue, we believe targets should remain in place which will keep the Greek government focused tightly on these projects in order to raise budget revenue. However, we have witnessed a tendency for the Greek government to relax ethical standards in order to reach a deal at any price in the small group of sales that have progressed. In a number of these cases, companies run by Greek oligarchs, who are not immediately driven away by the almost-impenetrable Greek bureaucracy (as many foreign investors are), tend to take prominent roles. At a minimum, tighter monitoring of the suitability of potential investors is required.
5. The Bank of Greece is sacrosanct: The Eurogroup and especially the ECB should remind the new Greek government to respect the full independence of the Bank of Greece Governor. Prior to the election campaign Mr Tsipras levelled substantial criticism at the appointment of former Finance Minister Yannis Stournaras as Governor, probably because he would be immune to SYRIZA pressures once installed. The ECB must warn Mr Tsipras off this tactic and make it clear that no SYRIZA attempts to undermine Governor Stournaras or the Bank of Greece’s critical role in financial policy making will be tolerated.
6. It’s all about the Primary Surplus: The Greek population has been demanding tax policy changes and protesting loudly about some form of “austerity” or against important reforms since time immemorial, so there is relatively little new other than the breadth of the protest since the current fiscal consolidation began in 2010. However, it is important to deal with Greece’s current long-term requirement, imposed by the Eurogroup, to generate and maintain a large primary budget surplus; flexibility here is critical. These targets were set in the run-up to the November 2012 Eurogroup marathon discussions on the Greek program, after the completion of Greece’s private sector debt restructuring (PSI). From 2016-2017, Greece is obligated to run a primary surplus of 4.5% of GDP, with some flexibility to drop this number slightly in 2018 and beyond. We believe this primary surplus target is politically unsustainable, and said so at the time the decision was made. In fact the current elections might be seen as proof of this theory, and the primary surplus has not yet reached 3% of GDP (Latest estimate is 2.7% for 2014). We recommend this budgetary target be reviewed with an eye to an immediate reduction to a more sustainable surplus level, provided reforms proceed, which of course is the underlying requirement for all the Eurogroup decisions. In our view the primary surplus reduction should be keyed to Greece’s debt service repayment requirements, which in all likelihood can be sharply reduced if maturities are extended and interest rates further lowered.

In sum, we think a deal with a SYRIZA-led government might be built around these elements: (A) Reducing Greece’s primary surplus obligation, allowing for somewhat more social spending, but not rehiring in the public sector, and an earnest opening to privatization. It is of course understood that programs for job creation in the private sector will be given priority in future development planning. (B) Extension of Greece’s repayment periods to Eurozone countries (GLF/EFSF) and lower interest rates on all official debt where still possible;  (C) Specific reform requirements/benchmarks to be achieved for each year’s interest rate reductions to be certified, providing a clear budgetary incentive to fully implement reforms.

Austerity without Justice

Austerity, yes! Justice, maybe

In a few hours we will know whether fear trumped rage in this latest round of Greece’s election drama.

Were the European leaders and bankers right in threatening Greeks with the direst of consequences should they support openly anti-Troika parties?

Was the Global Left, Occupy Wall Street and the “austerity hurts” crowd closer to the point – that Greece could not and should not be subjected to more of the pain of structural adjustment?

Does it matter?

The implementation of Greece’s reform program has three major hallmarks:

–Little or no domestic constituency for reform

–Underperformance on agreed targets at almost every juncture

–Confusion about Greece’s administrative capacity to undertake reforms

At least up to the present, limited penalties were imposed by the Troika for Greece’s sustained underperformance on reform targets.  So in a perverse way, underperformance has paid off and kept the cash flowing in.  Look at the so-called “closed professions” and see how little has changed.  For example, recall how the IMF’s debt sustainability reports for Greece were revised almost monthly last year to make the case for a deeper haircut at each juncture, yielding Greece more debt relief at each new stage of the discussion.

We suggest that the majority of the Greek people are reacting normally to a structural reform program that has few if any visible “up front” benefits.  Building a domestic constituency for reform will be a long process, but up to now the issue has been a clear lack of justice, giving the population no stake.  Tax increases alienated a large segment of the population early on.  Finally, horizontal cuts in wages and pensions, a choice made by the Papandreou-led PASOK government itself, spread the pain across many layers of Greek society instead of the appropriate target, the bloated public sector.  The Troika should not have accepted PASOK’s “job-preservation is paramount” arguments, since this shifted the pain of adjustment heavily onto the already overburdened private sector and hastened the collapse in economic activity, while barely reducing the Greek state’s revenue requirements.

This could be changed, and quickly, if leaders decided that the missing sense of justice would be addressed as a priority.   Any of these ideas could have been attempted in the last two years and would have reduced the rage we are seeing today, in addition to producing some visible evidence that things could change for the better and that crime did not pay.

Ideas include: 

–Effective prosecution of the corrupt political and business elite based on a reformed judicial system. But in the meantime, set up special tribunals focusing on public procurement scandals.

–Repair and extensive modernization of the taxation system, allegedly ALWAYS underway, to include use of foreign advisors in the debt collection process.

–Re-evaluation of politicians’ asset declarations.  Moving the “look-back” period on these assets to 1974, as many are proposing.

–High priority auditing of public sector jobs so the downsizing and mergers of public sector organizations can be accelerated.  Prosecution of those found to have made hiring decisions based on political criteria as well as fast-track removal of the individuals illegally hired from those jobs, with pension benefits cancelled.

–Thorough scrutiny of all offshore business activities linked to Greece, via special tribunals.

The skeptics will say these ideas are politically unacceptable. We suggest they focus pain where it should be focused, so to demonstrate to the Greek people that unavoidable austerity (at least for the short-term) can be implemented with some sense of justice, social responsibility and reform.

The Eurogroup hath spoken – Key decisions to propel Greece forward

So the deal is done.  Early this morning the Eurogroup concluded its deliberations on the Greek bailout. It is no longer a question of whether policy proposal “X” (haircut size, monitoring, payment systems, and prior conditions) is decided.  The issue is now implementation. We attach the final Eurogroup communique from February 21 at the end of this post.   Since more or less the entire financial press in Europe and many of its global affiliates will be reviewing the agreement, we thought Reform Watch Greece should briefly highlight a few key points and provide a short assessment on whether these measures will help structural reform proceed in Greece.

Preamble:  We cite this text section, with extremely blunt language, as evidence that the Eurogroup was intent on sending a clear message to the Greek population that this program is not simply something they can opt to ignore (our italics for emphasis):    “This new programme provides a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing and hence for safeguarding financial stability in Greece and in the euro area as a whole. The Eurogroup is fully aware of the significant efforts already made by the Greek citizens but also underlines that further major efforts by the Greek society are needed to return the economy to a sustainable growth path.”

Monitoring:  Seemingly bowing to German concerns, the Eurogroup requested the European Commission to enhance and to expand the role of the existing EC Task Force for Greece, including a new permanent on-the-ground role.  Additional EU member states’ expertise is also requested. This proposal is of course certain to generate new political resistance in Greece, across a wide spectrum.  Note: The IMF already has a more or less permanent presence here, via its low profile Resident Representative in Athens.  The communique further states that “Euro area Member States stand ready to provide experts to be integrated into the Task Force. The Eurogroup also welcomes the stronger on site-monitoring capacity by the Commission to work in close and continuous cooperation with the Greek government in order to assist the Troika in assessing the conformity of measures that will be taken by the Greek government, thereby ensuring the timely and full implementation of the programme.”

Debt Repayment Prioritization:  We have already witnessed a series of Greek politicians reacting almost rabidly to the concept that debt service would be given a higher priority than other domestic expenditures, since for many it raises sovereignty concerns. Some have even threatened to press for a debt-servicing moratorium.  In the negotiations over the bailout package, Greece also undertook to insert a modification to its constitution, when possible, allowing this obligation to be fulfilled, but for the foreseeable future a Troika-supervised accounting mechanism managed by the Ministry of Finance and its appointees will actually be utilized.   “The Eurogroup also welcomes Greece’s intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece’s debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter’s debt service directly to a segregated account of Greece’s paying agent.  Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible.”

PSI: A large part of the communique deals with PSI modalities, of less concern to us than the implementation of structural reform. We will avoid comment on these points.

A Closing Warning:  The final section of the Eurogroup communique is far more than a comforting closing statement of support. After the timing/details of the decision process are spelled out, the document closes with an emphatic reminder about the need for Greece to fully comply with program conditionality, the so-called “prior actions.”  If Greece had a better track record on structural reforms, we doubt that we would have seen such a clear formulation/warning:   “It is understood that the disbursements for the PSI operation and the final decision to approve the guarantees for the second programme are subject to a successful PSI operation and confirmation, by the Eurogroup on the basis of an assessment by the Troika, of the legal implementation by Greece of the agreed prior actions. The official sector will decide on the precise amount of financial assistance to be provided in the context of the second Greek programme in early March, once the results of PSI are known and the prior actions have been implemented.  We reiterate our commitment to provide adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.”  In no uncertain terms, the message is, “we are watching you.”

Start full communique text:  “The Eurogroup welcomes the agreement reached with the Greek government on a policy package that constitutes the basis for the successor programme. We also welcome the approval of the policy package by the Greek parliament, the identification of additional structural expenditure reductions of  325 million to close the fiscal gap in 2012 and the provision of assurances by the leaders of the two coalition parties regarding the implementation of the programme beyond the forthcoming general elections.

This new programme provides a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing and hence for safeguarding financial stability in Greece and in the euro area as a whole.

The Eurogroup is fully aware of the significant efforts already made by the Greek citizens but also underlines that further major efforts by the Greek society are needed to return the economy to a sustainable growth path.

Ensuring debt sustainability and restoring competiveness are the main goals of the new programme. Its success hinges critically on its thorough implementation by Greece.

This implies that Greece must achieve the ambitious but realistic fiscal consolidation targets so as to return to a primary surplus as from 2013, carry out fully the privatisation plans and implement the bold structural reform agenda, in both the labour market and product and service markets, in order to promote competitiveness, employment and sustainable growth.

To this end, we deem essential a further strengthening of Greece’s institutional capacity. We therefore invite the Commission to significantly strengthen its Task Force for Greece, in particular through an enhanced and permanent presence on the ground in Greece, in order to bolster its capacity to provide and coordinate technical assistance.

Euro area Member States stand ready to provide experts to be integrated into the Task Force. The Eurogroup also welcomes the stronger on site-monitoring capacity by the Commission to work in close and continuous cooperation with the Greek government in order to assist the Troika in assessing the conformity of measures that will be taken by the Greek government, thereby ensuring the timely and full implementation of the programme.

The Eurogroup also welcomes Greece’s intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece’s debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter’s debt service directly to a segregated account of Greece’s paying agent.

Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible.

The Eurogroup acknowledges the common understanding that has been reached between the Greek authorities and the private sector on the general terms of the PSI exchange offer, covering all private sector bondholders. This common understanding provides for a nominal haircut amounting to 53.5%. The Eurogroup considers that this agreement constitutes an appropriate basis for launching the invitation for the exchange to holders of Greek government bonds (PSI).

A successful PSI operation is a necessary condition for a successor programme. The Eurogroup looks forward to a high participation of private creditors in the debt exchange, which should deliver a significant positive contribution to Greece’s debt sustainability.

The Eurogroup considers that the necessary elements are now in place for Member States to carry out the relevant national procedures to allow for the provision by EFSF of (i) a buy back scheme for Greek marketable debt instruments for Eurosystem monetary policy operations, (ii) the euro area’s contribution to the PSI exercise, (iii) the repayment of accrued interest on Greek government bonds, and (iv) the residual (post PSI) financing for the second Greek adjustment programme, including the necessary financing for recapitalisation of Greek banks in case of financial stability concerns.

The Eurogroup takes note that the Eurosystem (ECB and NCBs) holdings of Greek government bonds have been held for public policy purposes. The Eurogroup takes note that the income generated by the Eurosystem holdings of Greek Government bonds will contribute to the profit of the ECB and of the NCBs. The ECB’s profit will be disbursed to the NCBs, in line with the ECB’s statutory profit distribution rules. The NCBs’ profits will be disbursed to euro area Member States in line with the NCBs’ statutory profit distribution rules.

– The Eurogroup has agreed that certain government revenues that emanate from the SMP profits disbursed by NCBs may be allocated by Member States to further improving the sustainability of Greece’s public debt.

All Member States have agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility so that the margin amounts to 150 basis points. There will be no additional compensation for higher funding costs. This will bring down the debt-to-GDP ratio in 2020 by 2.8pp and lower financing needs by around 1.4 bn euro over the programme period. National procedures for the ratification of this amendment to the Greek Loan Facility Agreement need to be urgently initiated so that it can enter into force as soon as possible.

– Furthermore, governments of Member States where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income accruing to their national central bank stemming from this portfolio until 2020. These income flows would be expected to help reducing the Greek debt ratio by 1.8pp by 2020 and are estimated to lower the financing needs over the programme period by approximately 1.8 bn euro.

The respective contributions from the private and the official sector should ensure that Greece’s public debt ratio is brought on a downward path reaching 120.5% of GDP by 2020.

On this basis, and provided policy conditionality under the programme is met on an ongoing basis, the Eurogroup confirms that euro area Member States stand ready to provide, through the EFSF and with the expectation that the IMF will make a significant contribution, additional official programme of up to 130 bn euro until 2014.

It is understood that the disbursements for the PSI operation and the final decision to approve the guarantees for the second programme are subject to a successful PSI operation and confirmation, by the Eurogroup on the basis of an assessment by the Troika, of the legal implementation by Greece of the agreed prior actions. The official sector will decide on the precise amount of financial assistance to be provided in the context of the second Greek programme in early March, once the results of PSI are known and the prior actions have been implemented.

We reiterate our commitment to provide adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.”  End text. 

Greece Needs Deeper Reforms to Overcome Crisis – IMF Survey and Report

Merry Christmas Mr Papademos!

First and foremost – No new taxes!

Note to readers:  this site will not specialize in Greek debt issues – we are all about advancing reform here.  That’s why it is essential that you read the IMF survey article which includes a link to the IMF Report dated December 13th, entitled: Fifth Review Under the Stand-By Arrangement, Rephasing and Request for Waivers of Nonobservance of Performance Criteria; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece.

For most purposes, the IMF Survey article is adequate, but you can go further and review the entire documentation stream that supported the release of the IMF’s share of the sixth tranche of the Troika bailout package. It makes quite sobering reading.

Here are a few relevant quotes from Poul Thomsen, IMF Mission Chief for Greece:

“Structural reforms have not yet delivered expected results, in part because agreed reforms are not being implemented. For instance, two flagship reforms—on collective bargaining and liberalizing restricted professions—have yet to deliver substantial results.”

“Progress has been made on many fronts but there is still a long way to go. Greece is still far away from the critical mass of reforms needed to transform the investment climate,”

Finally, Thomsen also noted in the press conference on the report’s release that delays in reform implementation are one crucial reason why investor sentiment has not recovered as expected under the program, and thus why the economy was weaker than expected.

Link:

http://www.imf.org/external/pubs/ft/survey/so/2011/CAR121611A.htm

What is the Troika?

The term is used quite frequently, in case you need the definition in the Greek context, here it is…..

http://gogreece.about.com/od/Glossary-of-Greek-Terms/g/The-Troika.htm

And the wikipedia version is here….

http://en.wikipedia.org/wiki/Troika_(triumvirate)

EU Commission Task Force for Greece — Initial quarterly report

EU Task Force for Greece —- Initial Quarterly Report

Entire report here, just click.  We will make these reports available here as soon as they are published.

From our archives (2010!) — Dear Troika

This article originally appeared in the Athens News, and elsewhere (Blogs), in late November 2010, at the time Greece was awaiting disbursement of the third tranche of the original Troika bailout package.  From our perspective, had the Troika played reasonable and focused hardball with the Papandreou government back then, Greece would not have had to suffer two “voluntary” debt restructurings and numerous other indignities.  We are especially interested in how little of the reform work discussed in the article has actually been completed.  The good news, at least, is that a reasonable amount has started…..finally.  Read and assess the progress yourself.

http://www.athensnews.gr/issue/13419/34428

Greek crisis divides IMF opinion – Business 360 – CNN.com Blogs

Greek crisis divides IMF opinion – Business 360 – CNN.com Blogs.