Another Greek Summer?


“In the interest of the Greek people, we need to bring these negotiations to a speedy conclusion”.

The managing director of the International Monetary Fund (IMF), Christine Lagarde, addressed these words to Alexis Tsipras, the Greek Prime minister, on April 3rd, in order to avoid another Grexit case.

Since the referendum of the 5th of July 2015 and the following €86 billion rescue plan of the 13th, the Greek’s economy is still struggling and now it needs another part of the €86 billion urgently. As a matter of fact, the Greek government has collected together enough cash (through raiding independent public agencies) to pay the main outflows, namely salaries and pensions, in May and June. However, it will not get the money until the creditors complete a revision of its progress on reforms, which has essentially stopped since October. Excluding the immediate and compulsory reforms applied in the last summer, which regarded the abolishment of the discounts of the VAT tax for the islands, the several cuts in the army sector and the first outline of the pensions reform, many other structural reforms have been put off. The government was supposed to liberalize most of the sectors of the Hellenic economy, to privatize the supply of electric energy and to improve the labour market to the most recent Europeans standards. Furthermore, the topic regarding pensions generated a popular and arid debate, on which the Syriza, the actual ruling party in Greece led by Alexis Tzipras, has been struggling to act in concert with the creditors, aiming to introduce a full reform of the entire system.

On the 20th of July a bond worth over €2 billion is going to mature, and the country once again might face the risk of default.

With a referendum on Brexit approaching in June and the absence of a solution to the refugee crisis, the European Commission seems willing to look for a fast compromise. But the IMF does not seem to share its same view. With reforms constantly delayed, the IMF does not think that one of the main proposes outlined on the summit of the 5th of July 2015, that is programme’s target of a 3.5% primary budget surplus by 2018, can be achieved. It wants to reduce the primary-surplus target to 1.5% and to delete some of Greece’s nominal debt. As stated by Christine Lagarde, “we can only support a program that is credible and based on realistic assumptions “. Unfortunately, such proposals do not appear to concern Eurozone’ s governments more than other topics in the current debate on the faith of the continent.

The general government debt of Greece (red bar) as a %of GDP 2014. (OECD).
The general government debt of Greece (red bar) as a %of GDP 2014. (OECD).

The IMF then wants Greece to start working on a “plan B”, which would probably involve further cuts to the Greek pensions.

In April a meeting of Eurozone’ s finance ministers intending to approve Greece’s fiscal plans and the following payment was cancelled. Although negotiators agreed on the granting of €5.4 billion (3% of Greek GDP) to be channelled in austerity measures, they reached a stalemate over an extra €3.6 billion in contingency measures to be adopted if Greece would not be able to reach the target primary surplus of 3.5%. The meeting of Eurozone’s finance ministers has been rescheduled for May 9th, and a compromise regarding the “plan B” has been reached. If this contingency plan turns out to be applied, the Greek government would reduce more expenses and then look for the approval of the creditors. Surprisingly, a debt relief plan was discussed, with clearer benefits in the medium-long term, like debt writedowns. Now, the agreement will have to be approved by the Greek parliament by May 24th.

With the summer approaching, within the upcoming Brexit referendum and the expected increase in migrants’ inflows, the priority must be finding a solid agreement between Greek officials and the creditors. A solution seems very probable, but in the worst case scenario, the ECB Governor Mario Draghi might be forced to step in once again.

Federico Fabio Frattini

Columnist at Cattolica Global Markets Magazine – Macroeconomics Section