Greece has two weeks to produce red meat

April 7, 2015

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

Greece has two weeks to produce some red meat.

The default scenario is off the table for the time being after Yanis Varoufakis, the finance minister, confirmed the country would meet a payment to the International Monetary Fund on April 9. But with more payments looming, the fear of bankruptcy will be back by late April if Greece doesn’t come up with some substantial reforms.

Without that, euro zone creditors will refuse to lend more money and Athens will probably suffer a disorderly default.

Greece has scraped together enough cash to meet the IMF payment, in part by extracting liquidity from quasi-state entities. However, the radical-left government has pretty much exhausted its techniques for squeezing blood out of a stone. Meanwhile, it has largely wasted two and a half months in office by lecturing creditors, sending out mixed messages about its willingness to default and coming up with amateurish proposals.

Now the government needs to get serious – unless Alexis Tsipras, the prime minister, is really willing to default, impose vicious capital controls and exit the euro.

Athens’ euro zone creditors are still hanging tough. Although they do not wish Greece to enter a spiral of self-destruction and are worried about the fallout if it does, they do not trust what the government says. As a result, creditors rightly want to see some meaningful actions before they lend any more money.

Tsipras needs to show he means business by suffering some political cost at home as a result of implementing unpopular measures. Otherwise, there is a risk that the government will take the cash, continue to speak with a forked tongue and still default in June if it can’t get a new long-term deal to its liking.

In the next fortnight – running up to a meeting of euro zone finance ministers on April 24 – the two sides should focus on three issues.

First, pensions. Although Athens has pushed up the retirement age in recent years, the current system is riddled with exemptions which allow many privileged people to receive early pensions.

Not only is Tsipras so far unwilling to close these loopholes, he wants to restore the so-called 13th pension, a bonus Christmas payment, to more than a million pensioners at a cost of 600 million euros. He also wants to pay an extra 326 million euros in supplementary pensions.

While there may be a case for increasing pensions for the very poorest, Tsipras’ 13th pension would kick in for anybody who receives less than 700 euros a month, which doesn’t amount to poverty in Greece. Moreover, supplementary pensions would benefit those who are already getting basic ones. So the government’s plans are more about dishing out goodies to supporters than meeting genuine need. Creditors need to push back.

Second, tax. Athens’ latest 26-page reform document, submitted to creditors last week, contains a host of ideas for cracking down on tax evasion. Many are good, including audits on large offshore transfers to home in on untaxed income, and issuing lottery tickets to customers who demand receipts as a way of combating VAT evasion. Athens also wants to strengthen the independence of its tax authority, with which previous governments have interfered.

The hitch is that the government expects these and other proposals to produce 4.7 billion to 6.1 billion euros of revenue this year. Maybe in time they will generate significant cash, but neither Athens nor its creditors should count on much in 2015. Since deep reform is more important than fiscal austerity, the government should be told to carry on with these measures but not factor much revenue from them into its fiscal forecasts.

Third, banking. Athens rightly says the sector has been marred by clientelism and too close a link with the political system. The snag is that this government has seemingly continued to meddle itself.

Since Tsipras took office, the chairmen of two of the largest banks, National Bank of Greece and Eurobank, have both been replaced with people who are close to the new government. Meanwhile, the chairman of the Hellenic Financial Stability Fund (HFSF), the bank bailout fund through which 40 billion euros of creditors’ money has been channelled, has been forced to resign.

These are worrying developments given the HFSF was supposed to be at arm’s length from the government and there is no official channel through which politicians can bring about management changes in commercial banks. Athens’ latest promise to enhance the HFSF’s independence rings hollow.

Meanwhile, the government wants to set up a bad bank to manage some of the industry’s vast non-performing loans. While this is an excellent idea in principle – which could result in the creation of good banks that would start providing credit to the real economy again – it could lead to yet more clientelism given the sector’s re-politicisation.

Greece’s creditors should insist on a proper explanation of what happened with the recent management changes and possibly unwind some of them. They should also find more effective ways of depoliticising the industry before agreeing to finance a bad bank.

Athens has avoided a confrontation with creditors this week. But unless it uses this two-week window to produce serious reforms, it cannot postpone one for long.

3 comments

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i have a feeling that Greeks smell the fear of the EU leaders of seeing their pet project fall apart. Willing to bend over backwards to accommodate
Greece, the EU leadership has shown its Achilles heel. So, Greece will continue to push while the creditors whine. And while the caravan passes the goes continue to bark.

Posted by ofilha | Report as abusive

Greece’s achilles heel is the bank run which is forcing the ECB to lend ever-lager sums to the banks via the BofG. ECB is not allowed to lend to insolvent banks but the Greek banks are deeply insolvent. My guess is that the ECB will set a ceiling for ELA of around EUR 100B.

Posted by nixonfan | Report as abusive

Its high time for >Greece to leave the EUR and EU and start to learn the realities of earning the money they want to use.

Posted by jacobsch | Report as abusive