The Eurogroup of 9 May has clearly paved the way for a new agreement between Greece and its creditors on 24 May. An agreement that will sanction the first evaluation of the program, nearly four months after its commencement, which will establish the principle of a “reprofiling” of Greek debt and which will establish a new package of measures present and future for a total of 5 4 billion. Whereby Greece likely will have the new tranche of 5.5 billion program, which should enable it to meet its commitments for the whole of this year, 2016.
Alexis Tsipras government largely claim victory after the agreement. And it is true that the opening of the discussion on debt represents the recognition of an ancient requirement of the Greek executive. The host of Maximos the Greek Matignon, can also boast of having imposed its choice at the Eurogroup by vote before the end of the evaluation, an austerity plan by its Parliament including pension reform and tax reform. This strategy could steer the finance ministers, it was finally sanctioned by the Eurogroup. Finally, Alexis Tsipras imposed the idea of an automatic preventive mechanism in case of deviation from the budgetary target for 2018 rather than precise measures as was the Euro.
The corrective mechanism for 2018 a victory creditors
But these three success must be qualified. First, because the creditors have practiced one of their usual strategies: seek ever more to get a little more by giving the impression to the Greeks to have won a victory. This strategy was inaugurated in July 2015, when the Eurogroup had asked a privatization fund based in Luxembourg. The Greeks had obtained the repatriation in Athens this fund, but the idea – new – the fund had been maintained. It is the same for these contingency measures to ensure the goal of a primary budget surplus, excluding debt service, 3.5% of GDP.
These measures were discussed only last month. The Greek government has managed to replace it with an automatic adjustment mechanism of public expenditure, but not detailed binding. The difference is minimal and, moreover, the statement of the Eurogroup of May 9 remains very ambiguous on this point, citing a “package of measures. “In reality, the Greek Government on this point, declined. This winter, the government did not hide his ambition to challenge the goal of 2018. This is also one of the reasons that justified the Greek request to dispense with the IMF in the future. Athens knew that, with the IMF, it was more difficult to negotiate the objectives and hoped to discuss with the Eurogroup. From this point of view, the bet is missed entirely. The mechanism provides for an additional austerity package that will not require the approval of the Greek parliament. And if the Greek Government was able to play its strategy of “lesser evil” to the other measures trying (not always successfully) to protect the most fragile, the addition is ultimately very heavy. This is a new austerity plan that had to accept Alexis Tsipras.
The logic of the old programs persists
In fact, it is the logic of previous programs which remains in force, and that is what is most worrying. The statement of the Eurogroup of May 9, the prelude to the agreement of 24 May, “sanctify” in fact the goal of a primary surplus of 3.5% of GDP for 2018 and even created, as has been the see an “iron cage” to ensure its realization. Related measures “reprofiling” of public debt are even carried over to 2018 and after the “successful completion” of the program until its closure. So we remain in the idea behind the three memoranda: “reforms” that are in reality of budget measures based on accounting objectives, will recreate conditions for growth in Greece. The story of the crisis since 2010 continues to show that this is an error, but nothing happens. So we will further weaken the Greek domestic demand by reducing pensions, downsizing of government (a retirement five continue to be replaced), heavier taxation of households and businesses into believing that the achievement of fiscal targets will attract investment and boost growth. The Greek Government has accepted the logic of “Ricardian neutrality” which however has more to dream than reality.
The lack of credibility of the hopes of the Commission
By subjecting a austerity plan of 3% of GDP with another to come before 2018 an additional 2.5% of GDP, above all we will discourage anyone from investing in the country. The European Commission promises a growth of 2.7% in 2017 to Greece. These are few credible figures to the extent that all creditors forecasts proved inaccurate. Recall, for example, that the 2010 program included, for example, a 2.1% growth for 2013 and 2014. In fact, the Greek economy shrank by 3.2% in 2013 and rose 0 7% in 2014. given the extent of the ‘effort’ requested new countries, such growth is unlikely. Especially as the effect of the pension reform will be felt next year and that all investors will wait fail in 2017 the “second” whammy of the “mechanism” patch to achieve the target of 2018. .. so we could end up with Greece still on his knees in two years.
Towards a debt reprofiling
But in the logic adopted by the Eurogroup and the Greek government, despite the “reprofiling” of the debt, the country will be forced to maintain a long high primary surplus in order to have the resources necessary for repayment of the restructured debt. In other words, Greece is still contained in a deflationary logic austéritaire and long. And therein lies a major problem that leads back to the question of debt. The Eurogroup and the European Stability Mechanism reaffirmed Monday, May 9 emphatically no question of a “haircut”, ie a reduction in the nominal stock of debt owed by Greece. That offers the Eurogroup is an adjustment of the repayment conditions. From this point of view, it is wrong to state, as did Alexis Tsipras from the rostrum of parliament on May 8 we will discuss for the “first time” debt restructuring. The periods of repayment, grace periods and interest have already been redeveloped to debt held by Europeans in 2012.
A reprofiling associated with a deflationary policy
This arrangement, also called “reprofiling” certainly reduced the value ‘updated’ debt. An outstanding debt for longer and with less interest was ultimately given the inflation, a lower value. European states therefore agree actually an implicit loss and lighten the burden of repayments for the Greeks. Great, but the effectiveness of this reshaping is far from assured precisely because it is accompanied by a constant policy of austerity which has a deflationary effect. For three years, inflation in negative territory in Greece. Therefore, the effects of losses related to the discounting of debt are lower and the cost to the debtor remains high. Here’s why this “reprofiling” is a false victory of the Greek government: no real policy to stimulate activity and inflation without abandoning necrotizing austerity, the debt burden for Greece will remain huge. It will be a sword of Damocles that will discourage serious investors and willing to intervene in the long term.
What weight for future refunds?
Especially it will observe about the conditions of the “reprofiling. “Several technical tracks are mentioned, but the essential thing is: what proportion of Greek revenues will be destined for debt repayment and for how long? Recall logic implemented: the Greek budget will have primary surpluses to build up reserves during the “grace period. “This reduces inflation so the effect of updating the value of the debt. Accordingly, once the grace period ended, it will still generate surpluses to meet the commitments. Especially since, as recalled the statement of the Eurogroup, the goal is to quickly return to Greece on the markets, where it will borrow at high rates to repay the principal European debt. The cost of debt will therefore remain heavier. The European Commission referred to a limit of 15% of GDP for the country’s financing needs each year. If this limit is applied, it will be considerable and now represents 26 billion euros. The revenues of the Greek state amounted to 55 billion euros in 2015 … Starting from this basis, the “reprofiling” will bear a heavy burden on Greek budget once the grace period has passed. Overall, the “peonage debt,” in the words of economist Costas Lapavitsas will remain the reality of Greece for decades: the wealth created will be captured for the creditors, which will reduce the wealth created … the legitimacy of this debt remains problematic.
Persevere diabolicum is …
Behind the cries of victory and satisfecits the Greek government, reality may therefore be more difficult. Without real nominal reduction of debt stock, combined with a true European reconstruction plan to revive the activity and inflation, Greece will not come out of the rut. Recall that the 2012 restructuring has reduced Greek debt to 100 billion euros, but the austerity policies associated with this plan has actually led to a heavier weight of the debt due to the collapse of GDP. Recall also that the measures of “reprofiling” of 2012 have not resolved the problem of the Greek debt. Yet ignoring these lessons, the Eurogroup still refuses to change its logic and remains attached to that, so far, failed. And the Greek government has little choice but to follow that path.
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