The Eurozone presses Greek reforms: Rewind, Reset, Reform, Finally? Part 2

Posted on February 24, 2015 by Eyes and Ears

Reform Watch Greece has been here a long time (2011), and we have seen our fair share of Greek reform proposals. Since the Eurogroup quickly blessed the Greek submission February 25^th as enough to work with for the next four months, there is not much point in overanalyzing these starting positions. Greece will be fortunate if even one quarter of these reforms can be implemented by mid-2015. Below we provide the text of Greece’s reform proposals as publicized early on February 25, WITH SHORT ANNOTATED COMMENTARY ON EACH SECTION (Bold headers).

Dear President of the Eurogroup, In the Eurogroup of 20 February 2015 the Greek government was invited to present to the institutions, by Monday 23rd February 2015, a first comprehensive list of reform measures it is envisaging, to be further specified and agreed by the end of April 2015.

In addition to codifying its reform agenda, in accordance with PM Tsipras’ programmatic statement to Greece’s Parliament, the Greek government also committed to working in close agreement with European partners and institutions, as well as with the International Monetary Fund, and take actions that strengthen fiscal sustainability, guarantee financial stability and promote economic recovery.

The first comprehensive list of reform measures follows below, as envisaged by the Greek government. It is our intention to implement them while drawing upon available technical assistance and financing from the European Structural and Investment Funds.

Truly

Yanis Varoufakis

Minister of Finance

Hellenic Republic

RWG Comments: While this is a good introduction, it needed to mention at least once in this section the Greek side’s commitment to take no measures with a budgetary impact. Its omission tells us something but it was clearly not a deal-breaker. It also drops an oft-mocked phrase used by Minister Varoufakis in earlier documents about the new government’s “commitment to broader and deeper reforms.”

Fiscal structural policies

Tax policies – Greece commits to:

Reform VAT policy, administration and enforcement. Robust

efforts will be made to improve collection and fight evasion

making full use of electronic means and other technological

innovations. VAT policy will be rationalised in relation to

rates that will be streamlined in a manner that maximises actual

revenues without a negative impact on social justice, and with a

view to limiting exemptions while eliminating unreasonable

discounts.

Modify the taxation of collective investment and income tax

expenditures which will be integrated in the income tax code.

Broaden definition of tax fraud and evasion while disbanding

tax immunity.

Modernising the income tax code and eliminating from it tax

code exemptions and replacing them, when necessary, with social

justice enhancing measures.

Resolutely enforce and improve legislation on transfer

pricing.

Work toward creating a new culture of tax compliance to ensure

that all sections of society, and especially the well-off,

contribute fairly to the financing of public policies. In this

context, establish with the assistance of European and

international partners, a wealth database that assists the tax

authorities in gauging the veracity of previous income tax

returns.

RWG Comments: With few details it is rather difficult to get a true sense of the priorities, for instance will there be a focused “chase the rich” campaign or simply a raft of new legislation? Everything here sounds well-intentioned and designed to increase tax collections but we must see which tax code changes are coming in which order and which privileges will remain in place for those groups that helped to elect the current government. We did not expect Greece’s Eurozone partners to find much fault other than to ask for a timeline and details.

Public Finance Management – Greece will:

Adopt amendments to the Organic Budget Law and take steps to

improve public finance management. Budget implementation will be

improved and clarified as will control and reporting

responsibilities. Payment procedures will be modernised and

accelerated while providing a higher degree of financial and

budgetary flexibility and accountability for independent and/or

regulatory entities.

Devise and implement a strategy on the clearance of arrears,

tax refunds and pension claims.

Turn the already established (though hitherto dormant) Fiscal

Council into a fully operational entity.

RWG Comments: Generally positive but without details on the arrears clearance mechanisms to be used, any evaluation is difficult.

Revenue administration – Greece will modernise the tax and

custom administrations benefiting from available technical

assistance. To this end Greece will:

Enhance the openness, transparency and international reach of

the process by which the General Secretary of the General

Secretariat of Public Revenues is appointed, monitored in terms

of performance, and replaced.

Strengthen the independence of the General Secretariat of

Public Revenues (GSPR), if necessary through further

legislation, from all sorts of interference (political or

otherwise) while guaranteeing full accountability and

transparency of its operations. To this end, the government and

the GSPR will make full use of available technical assistance.

Staff adequately, both quantitatively and qualitatively, the

GSPR and in particular the high wealth and large debtors units

of the revenue administration and ensure that it has strong

investigative/prosecution powers, and resources building on

SDOE’s capacities, so as to target effectively tax fraud by, and

tax arrears of, high income social groups. Consider the merits

of integrating SDOE into GSPR.

Augment inspections, risk-based audits, and collection

capacities while seeking to integrate the functions of revenue

and social security collection across the general government.

RWG Comments: This was probably well received, although the systemic changes mentioned are unlikely to have visible short term impact in the Greek context. We believe use of foreign tax and customs advisors and collectors in the short and medium term would be far more efficient in terms of boosting revenue collection and for training, but this remains an almost taboo subject in Greece. At least the Greek side seems open to use of foreign technical assistance, but Greece has almost always utilized small amounts of help on tax system reform, including the EU Task Force which has been present since the first year of the Greek crisis.

Public spending – The Greek authorities will:

Review and control spending in every area of government

spending (e.g. education, defense, transport, local government,

social benefits)

Work toward drastically improving the efficiency of central

and local government administered departments and units by

targeting budgetary processes, management restructuring, and

reallocation of poorly deployed resources.

Identify cost saving measures through a thorough spending

review of every Ministry and rationalisation of non-salary and

non-pension expenditures which, at present, account for an

astounding 56% of total public expenditure.

Implement legislation (currently in draft form at the General

Accounts Office – GAO) to review non-wage benefits expenditure

across the public sector.

Validate benefits through cross checks within the relevant

authorities and registries (e.g. Tax Number Registry, AMKA

registry) that will help identify non-eligible beneficiaries.

Control health expenditure and improve the provision and

quality of medical services, while granting universal access. In

this context, the government intends to table specific proposals

in collaboration with European and international institutions,

including the OECD.

RWG Comments: The proposed cost savings steps noted here are not all new ideas, and in any event will take a long period for implementation. Cutting high public sector non-wage costs should find favor with creditors, but is not a new concept. The final bullet in this set is interesting as it is generally moving Greece in the direction of the EU; in earlier periods health sector reforms that lowered direct health care costs (esp access to prescription drugs) ran into intense opposition. Accordingly we need to see these proposals in final form for details.

Social security reform – Greece is committed to continue

modernising the pension system. The authorities will:

Continue to work on administrative measures to unify and

streamline pension policies and eliminate loopholes and

incentives that give rise to an excessive rate of early

retirements throughout the economy and, more specifically, in

the banking and public sectors.

Consolidate pension funds to achieve savings.

Phase out charges on behalf of ‘third parties’ (nuisance

charges) in a fiscally neutral manner.

Establish a closer link between pension contributions and

income, streamline benefits, strengthen incentives to declare

paid work, and provide targeted assistance to employees between

50 and 65, including through a Guaranteed Basic Income scheme,

so as to eliminate the social and political pressure for early

retirement which over-burdens the pension funds.

RWG Comments: We do not see much that is new here, although the focus on eliminating early public and banking sector retirement incentives gets needed attention; some work has been done in this area already. This segment of proposals should be non-controversial with creditors but will take years for implementation and each cost-cutting step faces strong resistance here in Greece.

Public administration & corruption – Greece wants a modern

public administration. It will:

Turn the fight against corruption into a national priority and

operationalize fully the National Plan Against Corruption.

Target fuel and tobacco products’ smuggling, monitor prices of

imported goods (to prevent revenue losses during the importation

process), and tackle money laundering. The government intends

immediately to set itself ambitious revenue targets, in these

areas, to be pursued under the coordination of the newly

established position of Minister of State.

Reduce (a) the number of Ministries (from 16 to 10), (b) the

number of ‘special advisors’ in general government; and (c)

fringe benefits of ministers, Members of Parliament and top

officials (e.g. cars, travel expenses, allowances)

Tighten the legislation concerning the funding of political

parties and include maximum levels of borrowing from financial

and other institutions.

Activate immediately the current (though dormant) legislation

that regulates the revenues of media (press and electronic),

ensuring (through appropriately designed auctions) that they pay

the state market prices for frequencies used, and prohibits the

continued operation of permanently loss-making media outlets

(without a transparent process of recapitalisation)

Establish a transparent, electronic, real time institutional

framework for public tenders/procurement – re-establishing

DIAVGEIA (a side-lined online public registry of activities

relating to public procurement)

Reform the public sector wage grid with a view to

decompressing the wage distribution through productivity gains

and appropriate recruitment policies without reducing the

current wage floors but safeguarding that the public sector’s

wage bill will not increase

Rationalise non-wage benefits, to reduce overall expenditure,

without imperiling the functioning of the public sector and in

accordance with EU good practices

Promote measures to: improve recruitment mechanisms, encourage

merit-based managerial appointments, base staff appraisals on

genuine evaluation, and establish fair processes for maximising

mobility of human and other resources within the public sector.

RWG Comments: Many of the topics in this cluster strike us as basic good governance/public administration issues and may be incorrectly classified as structural reform. This is a matter of labeling and semantics. That said, they can certainly be added to government priorities but not in exchange for other hard reform measures. Charging powerful Greek media companies for public goods used free (frequencies) will be a major challenge, and is a reform that is over 25 years late.

Financial stability

Instalment schemes – Greece commits to

Improve swiftly, in agreement with the institutions, the

legislation for repayments of tax and social security arrears

Calibrate instalment schemes in a manner that helps

discriminate efficiently between: (a) strategic

default/non-payment and (b) inability to pay; targeting case (a)

individuals/firms by means of civil and criminal procedures

(especially amongst high income groups) while offering case (b)

individuals/firms repayment terms in a manner that enables

potentially solvent enterprises to survive, averts free-riding,

annuls moral hazard, and reinforces social responsibility as

well as a proper re-payment culture.

De-criminalise lower income debtors with small liabilities

Step up enforcement methods and procedures, including the

legal framework for collecting unpaid taxes and effectively

implement collection tools

RWG Comments: The SYRIZA government has legislation ready on tax collection, this segment is simply an explanation of the approach. Creditors will likely want adjustments in some areas, and tougher controls on the moral hazard area. RWG warns against any discounting of the initial tax bill amount for late payers, as this simply encourages the next cycle to wait and game the system before payment. Bottom line: Acceptable to adjust penalties for late payers but It must always remain more cost effective to pay a bill when due.

Banking and Non-Performing loans. Greece is committed to:

Banks that are run on sound commercial/banking principles

Utilise fully the Hellenic Financial Stability Fund and

ensure, in collaboration with the SSM, the ECB and the European

Commission, that it plays well its key role of securing the

banking sector’s stability and its lending on commercial basis

while complying with EU competition rules.

Dealing with non-performing loans in a manner that considers

fully the banks’ capitalisation (taking into account the adopted

Code of Conduct for Banks), the functioning of the judiciary

system, the state of the real estate market, social justice

issues, and any adverse impact on the government’s fiscal

position.

Collaborating with the banks’ management and the institutions

to avoid, in the forthcoming period, auctions of the main

residence of households below a certain income threshold, while

punishing strategic defaulters, with a view to: (a) maintaining

society’s support for the government’s broad reform program, (b)

preventing a further fall in real estate asset prices (that

would have an adverse effect on the banks’ own portfolio), (c)

minimising the fiscal impact of greater homelessness, and (d)

promoting a strong payment culture. Measures will be taken to

support the most vulnerable households who are unable to service

their loans

Align the out-of-court workout law with the instalment schemes

after their amendment, to limit risks to public finances and the

payment culture, while facilitating private debt restructuring.

Modernise bankruptcy law and address the backlog of cases

RWG Comments: Much of this cluster depends on improving the efficiency of the judicial system, not addressed previously but covered below. Creditors will not be impressed with the focus in this section on social justice instead of banking system efficiency; if anything the outlines presented here appear to weaken the prospects for Greece developing a strong payment culture.

III. Policies to promote growth

Privatisation and public asset management – To attract

investment in key sectors and utilise the state’s assets

efficiently, the Greek authorities will:

Commit not to roll back privatisations that have been

completed. Where the tender process has been launched the

government will respect the process, according to the law.

Safeguard the provision of basic public goods and services by

privatised firms/industries in line with national policy goals

and in compliance with EU legislation.

Review privatisations that have not yet been launched, with a

view to improving the terms so as to maximise the state’s long

term benefits, generate revenues, enhance competition in the

local economies, promote national economic recovery, and

stimulate long term growth prospects.

Adopt, henceforth, an approach whereby each new case will be

examined separately and on its merits, with an emphasis on long

leases, joint ventures (private-public collaboration) and

contracts that maximise not only government revenues but also

prospective levels of private investment.

Unify (HRDAF) with various public asset management agencies

(which are currently scattered across the public sector) with a

view to developing state assets and enhancing their value

through microeconomic and property rights’ reforms.

RWG Comments: Clearly this subject is anathema to much of the SYRIZA electorate which considers inclusion of this issue in the reform list a major loss. Creditors will need to push hard for changes here as privatization should become the major channel for attracting private investment into Greece and this section still contains excessive restrictions. We are especially concerned the future of the process will be left in limbo without deeper Greek commitments to do more.

Labor market reforms – Greece commits to:

Achieve EU best practice across the range of labour market

legislation through a process of consultation with the social

partners while benefitting from the expertise and existing input

of the ILO, the OECD and the available technical assistance.

Expand and develop the existing scheme that provides temporary

employment for the unemployed, in agreement with partners and

when fiscal space permits and improve the active labour market

policy programmes with the aim to updating the skills of the

long term unemployed.

Phasing in a new ‘smart’ approach to collective wage

bargaining that balances the needs for flexibility with

fairness. This includes the ambition to streamline and over time

raise minimum wages in a manner that safeguards competiveness

and employment prospects. The scope and timing of changes to the

minimum wage will be made in consultation with social partners

and the European and international institutions, including the

ILO, and take full account of advice from a new independent body

on whether changes in wages are in line with productivity

developments and competitiveness.

RWG Comments: As in the previous section this subject is problematic to much of the SYRIZA electorate who will view its inclusion in the reform list as a major concession and divergence from the party’s announced policies. Moving in the direction of EU best labor practices is not massively problematic nor an unreasonable target, but reverting to older collective bargaining processes, even with new names and tweaks to the system, will be seen for what it is, a reform rollback.

Product market reforms and a better business environment – As

part of a new reform agenda, Greece remains committed to:

Removing barriers to competition based on input from the OECD.

Strengthen the Hellenic Competition Commission.

Introduce actions to reduce the burdens of administrative

burden of bureaucracy in line with the OECD’s input, including

legislation that bans public sector units from requesting (from

citizens and business) documents certifying information that the

state already possesses (within the same or some other unit).

Better land use management, including policies related to

spatial planning, land use, and the finalisation of a proper

Land Registry

Pursue efforts to lift disproportionate and unjustified

restrictions in regulated professions as part of the overall

strategy to tackle vested interests.

Align gas and electricity market regulation with EU good

practices and legislation

RWG Comments: Not particularly new, and not problematic, but implementation needs to be given top priority, especially competition policy and the high priority development of a business enabling environment. The energy sector needs a major focused initiative if Greece is to exploit its competitive advantages, not just a brief mention.

Reform of the judicial system – The Greek government will:

Improve the organisation of courts through greater

specialisation and, in this context, adopt a new Code of Civil

Procedure.

Promote the digitisation of legal codes and the electronic

submission system, and governance, of the judicial system.

RWG Comments: Absolutely essential to Greece’s modernization.

Statistics – The Greek government reaffirms its readiness to:

Honour fully the Commitment on Confidence in Statistics, and

in particular the institutional independence of ELSTAT, ensuring

that ELSTAT has the necessary resources to implement its work

programme.

Guarantee the transparency and propriety of the process of

appointment of the ELSTAT President in September 2015, in

cooperation with EUROSTAT.

RWG Comments: Unclear why this needs to be included as a current reform, since the institutional changes at ELSTAT were completed several years ago.

Humanitarian Crisis – The Greek government affirms its plan

to:

Address needs arising from the recent rise in absolute poverty

(inadequate access to nourishment, shelter, health services and

basic energy provision) by means of highly targeted

non-pecuniary measures (e.g. food stamps).

Do so in a manner that is helpful to the reforming of public

administration and the fight against bureaucracy/corruption

(e.g. the issuance of a Citizen Smart Card that can be used as

an ID card, in the Health System, as well as for gaining access

to the food stamp program etc.).

Evaluate the pilot Minimum Guaranteed Income scheme with a

view to extending it nationwide.

Ensure that its fight against the humanitarian crisis has no

negative fiscal effect.

RWG Comments: Mostly derived from SYRIZA campaign promises and the Thessaloniki program. Creditors will not find major issues as long as these reforms are not fiscally negative.

Reform Watch May 2012 Round Up…Did you REALLY expect changes?

Posted on May 31, 2012 by Eyes and Ears

Yes it’s an election period. And yes, you are tuned to Greece. Who in their right mind would expect a “caretaker administration/service government” to change anything? Especially anything that involved benefits levels or public sector staffing?

Just testing…We certainly didn’t. Nonetheless the country kept operating at deficit levels, meaning public sector salaries and pensions were supported by Troika bailout funds, as usual. Did Greece really move any closer to financial independence over this period? Were those bailout funds well spent or just scattered randomly for public consumption and to sustain businesses/public services that seriously need to restructure?

Below is a brief listing of how certain ongoing structural reforms were “processed” in Greece over the last month. It is basically a “low-performance report.” We are certainly glad we don’t have to compile a detailed matrix of accomplishments for Troika officials prior to disbursing the next cash injection (shape not yet decided) which Greece will so desperately need next month. There is precious little to work with, even for the strongest supporters of Greece in this difficult time. And let’s not forget that the former Papademos government basically sprinted to pass key pieces of reform legislation by mid-April (mostly unimplemented) so the first round of elections could be held in May.

None of this absolves Greece in any way of its requirement to produce a large list of budget cuts for 2013-2014 for Troika approval and vote on dozens of other reform measures by the end of June. No wonder Greeks prefer politics!

Privatization: While work on preparing assets already held at the Hellenic Republic Assets Development Fund (TAIDEP in Greek) goes on, policy decisions and transfers of new state assets to the Fund are frozen by edict until the June 17 elections. Socialist parties are doing all they can to stop work at the TAIDEP and some even talk of reversing it. The status of a number of government assets transferred to the TAIDEP in early May before elections is reportedly under review.

Health Sector: The new system of electronic prescription management, designed to reduce costs by limiting drug purchases, was partially offline in May for technical reasons.

Tax Issues/Revenue Collections: Revenue collections have fared poorly this year due to the recession and the extended election period. Some news reports note a 20-30% decline compared to last year and certain news outlets and high-level government sources characterized the situation as “desperate” during various political meetings and coalition-formation discussions throughout May. Reforms in the barely functioning tax collection mechanism, especially those designed to fight tax evasion, are not underway now, but major changes required by the Troika should begin in July.

Labor Market: As of May 14, all “old” collective labor contracts automatically expired. Those contracts could be replaced by so-called individual agreements and could include some wage reductions. This important labor market reform stipulates that a collective contract had to have been signed/reauthorized in the previous three months to be considered valid after May 14.

Public Sector Personnel System: Just days before the May 6 elections, word was released that the ambitious personnel reviews and job audits planned for the public sector would be delayed due to the elections. Nothing since then, but of course, public sector (BFGPS) paychecks keep coming.

European Community Monitoring Office: Shortly before the May 6 elections, a site for the Mission’s Headquarters in Gazi was announced. Public Sector employees already in that building protested immediately. Since then, not a word.

Bank recapitalization: This is not a structural reform, but since it is linked to the overall PSI package which supports reform, it merits mentioning. The bulk of the EFSF funds sent to Greece for this purpose in April were disbursed to four participating banks via the Hellenic Financial Stabilization Fund (HFSF) in mid-to-late May, with substantial action (Euros 18 billion) disbursed in the last few days of the month.

Scale of reform task facing Greece is monumental

See article below for a good summary (The Irish Times) of what Greece committed to do, under former-PM Papademos, by June 2012 as it received the first “new” bailout tranche under the so-called “Second Memorandum.” This is not fiction, and that money, disbursed in March, has been spent. The date for the Troika’s next return/review is not yet clear.

http://www.irishtimes.com/newspaper/world/2012/0518/1224316280691.html

The Eurogroup hath spoken – Key decisions to propel Greece forward

Posted on February 21, 2012 by Eyes and Ears

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’S PRIVATE SECTOR DEATH SPIRAL OR CHILDREN OF A LESSER GOD

Posted on December 18, 2011 by Solon

The country’s private sector is caught in a death spiral. ESPA infrastructure investments are not materializing and liquidity taps are drying up whilst foreign investment is not materializing, at least not until the country’s solvency situation is clarified. Typically, the “flagship” Fast Track Hellenikon former airport privatization plan is being moved to 2013-2015. In the meantime household consumption does not appear to be recovering, household bank reserves are being shifted abroad, and the state continues to withhold payments — as such there is no prospective source for new spending. On the external front, the emerging depressed growth throughout Europe is diminishing hope for a recovery led by tourism, shipping and exports.

7 out of 10 businesses in Greece are planning to reduce employee salaries and 1 in every 3 are planning to reduce staff levels whilst sales are dropping dramatically, even for export businesses, and the lack of cash flow creates an asphyxiating climate, with 70% of all business predicting that 2012 will be worse. These are the summary findings of a study carried out by IOBE, the Foundation for Economic and Industrial Research, and presented by IOBE at a press conference on 13th December 2011, covering the 2.000 largest businesses in the country employing approximately 3.000 people.

More specifically, 70% of the 2.000 largest businesses in the country are planning to reduce employee salaries (this is not the first reduction), 28% to reduce employee numbers, whilst more than 52% of businesses expect a reduction in sales in the next 12 months, hot on the heels of the cumulative sales reduction 20% between 2009 and 2010. The number of domestic investments is also predicted to drop by 50% across the board.

“The lack of cash flow has now been compounded by the lack business confidence for the country and its businesses, which makes the situation far worse” as stated by the vice president of the Greek Industrialists Association (ΣΕΒ) Haris Kyriazis, whilst the General Director of IOBE, Giannis Stournaras underlined that if the endeavor to restructure the economy does not succeed, the economic crisis may transform itself into a social crisis.

The study, carried out from April to July 2011, with the collaboration of the National Polytechnic University and opinion pollsters Public Issue, verified that the economic crisis has affected the entire private sector. All businesses appear to be experiencing a cash flow problem basically because their customers are also experiencing that very problem themselves (48%) but also because of the lack of access to credit from the banking system (36.5%).

The lack of access to credit from banks is decisive for the construction industry where more than 60% of construction companies surveyed declared that they are experiencing serious problems. This sector is also experiencing a greater exposure to the crisis because of, amongst other things, the refusal to pay for services rendered and goods supplied by a prime customer, the Greek Public Sector, as well as the vastly reduced request for services and goods from that customer. This is sometimes referred to as an “internal payments freeze”, which knowledgeable observers consider a standard Finance Ministry method to engineer budget targets for Troika auditors.

Manufacturers are experiencing serious cash flow problems due to demands for more immediate payments to their overseas suppliers ( a consequence of declining foreign confidence in Greece’s solvency) and due to pressure from low cost competitors, whilst the shift by consumers to cheaper categories is one of the main problems faced by hotels and restaurants.

The main line of defense for businesses for the next twelve months is the containment and reduction of salaries, according to 69% of respondents, cutbacks in bonuses and indirect benefits (34%), reduction in prices (34%), adjustments to working time (34%) and a reduction in employee numbers (28%). Export businesses seem to be weathering the crisis better as they appear to be making up for losses in the domestic market.

According to the study, 54% of export businesses predict an increase in sales in 2011, 87% of these however state that the increase will not exceed 10%. Only 45% of the 2.000 largest businesses in the nation have an export positioning. For manufacturing businesses however, the corresponding proportion is 70%. Businesses that do export attribute 30% of their turnover to export income. It remains an open question, however, as to how profitable these exports have become.

In total, businesses sampled indicated decreases in sales of 11% for 2009/10 and predict a further decrease in sales of 7% in 2011. 52.3% of businesses declared that the current year will close with a decrease in sales and only 10% anticipate an increase.

In the area of domestic investments, the number of investment plans has dropped by 50%, whilst their value by has dropped by 40% for the current year compared to last year. In manufacturing, the reduction in investments is of the order of 29%. For the period 2009-2010, the investment value of companies sampled was of the order of 5.16 billion euro. Nevertheless it is notable that 73% of businesses that plan to carry out investments in 2011-2012 closed the year with a profit in 2010, that two out of every three businesses which plan to carry out investments of over 1 million euro in 2011-2012 had also carried out sizeable investments in 2009-2010 and that 63% of those planning to carry out investments of over 1 million euro in the period 2011-2012 predict that their sales this year will increase or remain constant. These are the survivors, clearly with deeper pockets than most Greek companies.

The survey also found that building activity plunged in August this year. The number of new building permits decreased by 14.2% compared to the corresponding month last year, and that based on total building quantity, private building activity receded by 11.4%. Over the 8 month period January – August, the number of building permits dropped by 30.5% in comparison with the corresponding period in 2010, whilst the total building quantity decreased by 37.3%.

In light of these findings, the Troika and Horst Reichenbach’s EU Task Force have already expressed their concerns for the consequences of this continuing private sector death spiral on the economy and society as a whole since it not only feeds unemployment, but places a time bomb at the foundations of the tax revenue structure. In parallel, it increases the need for social security/unemployment expenditures and makes an exit from the tunnel increasingly remote.

Bureaucratic red tape remains untouched…as do the “closed shop professions” which have not been deregulated, the country remains a European leader in public sector corruption according to the recent report released by Transparency International with low productivity and an ever changing and complex tax structure.

As for inflation, despite the fact that Greece has been experiencing negative growth for the last 4 years, it is currently running at 5.5% with significant price increases on basic commodities which in turn undermine productivity and competitiveness. The lack of a fully competitive market in Greece is one cause of this not-unexpected phenomenon, the other being the barrage of new taxes which have over recent months raised prices despite many business owners’ declared efforts to hold the line. For early 2012 we can expect new energy taxes will generate another spike in inflation, further undermining Greece’s export competiveness, whilst the private sector, the only hope for real economic recovery, continues in the path of an asphyxiating death spiral.