27 Jul 2015
In case you have been hiding on a deserted island or reading too much of the misinforming press, here is an update on Greece and their bail-out plan.
What has happened?
Whilst in the middle of negotiations with the troika – European Central Bank (ECB), International Monetary Fund (IMF) and European Commission (EC) – the Greek Prime Minister announced a snap and unexpected referendum at the end of June, whereby citizens were asked to vote on the troika’s plan. The problems were as follows:
- calling a referendum in the middle of negotiations with your creditors was probably not the best idea when you’re trying to get more money from them;
- voters were asked to read a 90 page technical document, they had no hope of understanding, before voting;
- the plan submitted by the troika was void as soon as the referendum was called (i.e. they were voting for a plan that no longer existed); and
- the vote was touted by Greek politicians as a vote for no further austerity, whereas it could have had the implication of a vote for exiting the Eurozone.
Polls leading into the vote showed an overwhelming ‘Yes’ vote (i.e. symbolically, for staying in the Eurozone) but the majority voted ‘No’. Whilst the referendum annoyed the troika and made them even harder nosed, it did solidify the Greek Prime Minister’s power and popularity.
The Greek banks were forced to close as they begun to run out of money, and the Greek share market also closed. The closure of banks also included capital controls, which meant maximum daily withdrawals and no transfers into or out of the country.
Further, the Greek Finance Minister Varoufakis was forced to resign given his abrasive and grandstanding approach to negotiations, and replaced by an Oxford educated economist who is pragmatic and well liked.
Whilst this was happening, the ECB tightened screws on the Greek banks, requiring them to stump up more assets as collateral in exchange for emergency loans. Without the emergency funding, the Greek banking system would cease to exist. In addition, the IMF released a paper that said the Greeks could not possibly pay back the current debt load without some sort of debt forgiveness and debt restructure.
The Germans are vehemently opposed to debt forgiveness for two reasons: it is German taxpayer money that is lost, and it sets an example for other Eurozone countries who might ask for the same deal.
All this forced Greek PM Tsipras to negotiate with both hands tied behind his back – his people wanted to stay in the Eurozone, he had annoyed the creditors and the banks required continued funding. The creditors seized on this opportunity, much to the dismay of most external observers, and forced the Greek PM to sign off on further austerity measures, without debt forgiveness, in order to get another bail-out.
In order to get access to the 86 billion euros (127.9 billion AUD) in bail-out funds, bring debt extensions/restructuring back to the table, and continue to provide liquidity to the banks, the Greeks first had to pass two sets of reform packages in their parliament. The reforms included:
- increase in VAT (GST) and the removal of exemptions;
- reforming of the pension system;
- adopting major reforms for its civil justice system;
- opening up key professions;
- implementing a toolkit of market changes (e.g. Sunday trading);
- modernising collective bargaining, industrial action, and redundancy laws; and
- de-politicising the public service and cutting costs.
One of the contentious issues of the deal was a 50 billion euros asset fund, which is to be funded from Greek asset sales. The creditors wanted a three year timeframe on asset sales (essentially forcing fire sales) and for the fund to be based in Luxembourg under the creditors’ control. This was watered down under the deal, with the timeframe extended to 30 years and the fund being maintained in Greece, but under the watchful supervision of the creditors.
Greek parliament passed both stages of the reforms, but only with support from the main opposition parties to the leading coalition party. Up to 30 Syriza party members either voted against reforms or abstained. This forced the Greek PM to reshuffle his front bench, ensuring that those dissident members would no longer hold key positions in his parliament.
The passing of the reforms resulted in bridging finance being provided to the Greeks so they could meet an ECB debt repayment and clear out the amounting owing to the IMF. The ECB then re-started emergency funding to the Greek banks, thus allowing them to maintain liquidity. They have since re-opened, but capital controls still remain in place.
What will happen now?
The Greek PM has the support of his people and the opposition parties, who really have no suitable PM-elect. But he’s losing support from the left-faction within his own party, who rose to power on the back of anti-austerity. This may lead to fresh elections in the next few months, if a motion for loss of confidence in his leadership of the party is successful. This would most likely lead to a grand coalition where opposition parties will join Tsipras’ more centralist Syriza party, with Tsipras remaining as Prime Minister.
The creditors had been due to touch-down in Greece this week to begin negotiations over the bail-out program in order for the funds to be released. This has been delayed as it appears the Greeks weren’t willing to allow creditors to have full access to key staff (senior level) and there were some logistical issues involving facilities. In addition, the Greeks have asked the IMF for a new rescue program as the original 28 billion euros bailout program was scrapped last week.
Further, the Greeks might have to legislate more reforms through their parliament in order to gain access to the first tranche of the bail-out funds. The creditors will also be keen to see how the implementation of these reforms is progressing. If all goes well and progress is made, debt restructuring and extension will be put back on the table.
The key date now is August 20 when Greece owes another 3.2 billion euros to the ECB and 500 million euros is needed for interest payments and a small loan repayment to the IMF. If the first tranche of bail-out funds is not forthcoming, then another bridging loan will be required so that negotiations can continue.
Whilst some still believe Greece should exit the Eurozone and go back to their own currency, they can’t and won’t (nor should they). This would effectively bankrupt the country, lead to even stricter capital controls, result in very high levels of inflation, destroy the banking system, and cut them off from the rest of Europe.
The deal they received from the creditors was the least worst; given the Greeks don’t have an efficient and effective public administration, it would take a very long time to print enough new currency (if they were to exit), they don’t have enough reserves in their banks to sustain them, and they would need another economic bloc or country to provide significant aid, some of which would include humanitarian aid.
The best thing the Greeks can do, is to get on with it.
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