WSJ — Greece is applying reforms to meet bailout pledges but extra contingency measures demanded by the IMF are impossible to legislate, its finance minister said in a leaked letter to euro zone finance ministers before Monday’s Eurogroup meeting.
The euro zone’s 19 finance ministers will gather in Brussels on May 9 to discuss Greece’s reform programme and a new set of contingency measures that Athens is asked to adopt to ensure it can achieve agreed fiscal targets in 2018.
A successful conclusion of the bailout review would unlock bailout funds under a financial aid programme, agreed by Greece and euro zone countries in July, and pave the way for debt relief talks.
While Greece’s government has mostly reached agreement with its official lenders on a 5.4 billion euro package of measures to hit a 3.5 percent primary budget surplus target in 2018, the IMF thinks this will be tough to achieve.
The International Monetary Fund says the package would suffice if the 2018 primary surplus target is cut to 1.5 percent, but that extra savings are needed to attain the 3.5 percent target, pushing for contingency measures worth 3.6 billion euros.
Instead of backing the IMF’s pressure on Germany, Mr. Tsakalotos attacks the IMF’s maths, insisting that the €5.4 billion of measures are enough to fulfill the bailout plan.
The problem for Mr. Tsakalotos is that the creditors who matter have already heard his arguments, and so far they aren’t swayed. Greece’s fate is caught up in a struggle between the dominant players in the drama: the IMF and Germany. As long as Germany rejects the IMF’s calls for easier fiscal targets and debt relief, Greece may have no choice but to pass further austerity.
Some players, including the European Commission and France, are more sympathetic to the Greek government’s pleas that creditors are putting it under intolerable political pressure. But Brussels and Paris play only secondary roles in a dispute that’s really about Berlin versus Washington.
Here’s what Mr. Tsakalotos wrote to eurozone finance ministers:
Dear Colleagues
I am writing to you before our eurogroup meeting of Monday to clarify the position of the Greek government with respect to both the closing of the first review and the discussion on debt.
There is, I think, a general recognition that my government has kept to both the spirit and the letter of our summer agreement. True the closing of the first review has taken longer than expected but this does, to a large extent, reflect the sheer bulk of the reforms carried out over the last ten months. Many of the reforms needed very complicated legislation and required the help not only of the generous technical assistance provided but also lengthy negotiations with the institutions to get the legislation right from the beginning.
But it also reflects that we have been engaged not just with fiscal adjustment but serious structural reforms that address many of Greece’s long-standing weaknesses in the financial and judicial systems, in the tax administration (including a new autonomous and independent tax revenue authority) , and perhaps most importantly of all with respect to pensions. The reform on pensions, currently in parliament, addresses in a radical way, the sustainability of the system over the long run by integrating all existing funds into one, by providing the same rule for all pensioners and by reducing replacement ratios.
We have now agreed with all four institutions the items included in the first review, not only the fiscal package of 3% of GDP, but all the structural measures as well. The latter also include the opening up of the entire NPL market, apart from some temporary protection of loans related to primary residences, and the new Privatization and Investment Fund. From our perspective we have delivered all that was promised – in certain respects more. And all this in the context of recapitalizing our banks and addressing an incredibly complex and severe refugee crisis.
However as you know there is a disagreement amongst the institutions on the impact of the fiscal package since the European institutions, and ourselves, are convinced that the package is enough to reach the 3.5% primary surplus target in 2018, whereas the IMF argues that it is only enough to reach 1.5%. This estimate, it should added, is based on the same methodology that produced an under-forecast in 2015 by a magnitude of two billion! It is important to point out that a 2% divergence for 2018 is an extraordinarily large one. And this makes the proposal for an additional 2% parametric contingent measures legislated up front very problematic.
“Firstly there is no constitutional way to vote in contingent measures in Greece, and with talks I have had with colleagues, this also is the case in some other member states. So we would just have to legislate the measures and “merely” promise that they would be rescinded in 2018 if not needed. Appealing to both your economics and political experience, can you imagine taking to parliament instead of an expected package of 5.4 billion, one of 9 billion? Indeed any package in excess of 5.4 billion is bound to be seen by both Greek citizens and economic agents, within and beyond Greece, as socially and economically counterproductive. There is no way such a package could pass the present government, or, for that matter, any democratic government that I could envisage.”
Despite the above, and at great cost to us since our proposal is a very tough one indeed, we have engaged constructively with the institutions to build on the four key words, referred to by both Christine and Jeroen, in our last eurogroup: legislative, objective, automatic, credible. We have proposed an automatic regulator to make adjustment to our budget spending – on the discretionary and non-discretionary items in each ministry with a few specified exceptions for reasons of national defence or protecting the poor – in order to provide the additional assurance required by member states that we will be on course for a 3.5% primary surplus in 2018. The European institutions have given many suggestions for improving the mechanism in line with the eurogroup decision which we have taken on board. You should have our proposal in its final form by Monday.
I see no reason why such a mechanism, together with the reform package, should not be more than enough to close the first review. Which brings me to the question of debt which is also part of our summer agreement. I consider that what Greece now needs is a clear statement, of measures now and ones to be applied in the future, which will help investor confidence that Greece has turned the corner, and that country risk has (finally!) been removed from the agenda. Investors need a clear runway, which at the very least requires a clear statement from the eurogroup that Greece is on the right path, to invest thereby helping us turn a vicious circle of fiscal measures-recession-more fiscal measures into a virtuous cycle driven by growth. And it is not only a question of investment and growth. It is also confronting the reform fatigue of the Greek people who have faced over six year of crisis and have lost 25% of their GDP. A return to growth should mitigate the need for yet another round of new fiscal measures, but more importantly it will underpin a renewed reform drive at addressing our many structural problems. This must surely be in the interest not only of the Greek people but our creditors.
The elements for closing the first review and providing debt relief are, I firmly believe, all there. Greece has since the summer carried out its promise for reform while at the same time we have provided a source of geo-political stability in a very troubled region by the way we have responded to the refugee crisis. Nobody should believe that another Greek crisis, leading perhaps to another failed state in the region, could be beneficial to anyone.
My government, and I, will continue to work for an overall solution. But such a solution must be credible not only to our creditors, and the institutions, but to the Greek people, who ultimately need to “own” the programme and be able to sustain it. I would like to think that we are so close and not have to add “yet so far”
My very best wishes,
