Article / 02 May 2017 at 15:37 GMT

Athens accepts additional austerity to secure bailout funds

Managing Partner / Spotlight Group
United Kingdom
  • Greece reaches deal with creditors to secure disbursement of further rescue funds
  • Greece needs the funds to repay €7.5 billion of debt maturing in July
  • Last year, Greece said no more austerity; today it caved in
  • Debt burden at 179% of GDP is unsustainable, IMF says
  • The answer is not more money and debt forgiveness
  • Let Greece default and leave the Eurozone
  • Make foolish investors pay the price of their greed

Greek parliament
 The Greek parliament in Athens. The indebted country has reached a deal with 
international creditors on further rescue funds. Photo: Shutterstock


By Stephen Pope

The Greek government has abandoned last year’s defiance and promised to cut pensions and reduce tax breaks to clear the way for the disbursement of further rescue funds from international lenders and possibly secure a reworking of its debt burden, officials announced on Tuesday.

Greek officials and international creditors reached a deal early on Tuesday on a package of bailout-mandated reforms, according to news reports. This draws a line under six months of negotiations.

Greece now must legislate the new measures before the Eurozone finance ministers approve the disbursement of loans. This may be a soon as at the next scheduled Eurogroup meeting on May 22.

Just over one year ago, the Greek prime minister, Alexis Tsipras, rejected the idea of more austerity measures and called for debt relief instead. Tsipras was taking this line (I cannot call it a hard line) as he understood he enjoyed a fragile parliamentary majority.

Why did Greece capitulate? The answer is simple: Athens has no choice as it needs funds to repay €7.5 billion of debt maturing in July.

The Eurogroup gathering in May is likely to be the first occasion where the subject of debt relief for Greece will be given serious consideration. Sadly, it is not just a simple issue of agreeing to cancel a certain amount of Greek debt, as the subject has different meaning to both sides.

The International Monetary Fund has long maintained that the level of Greek debt is unsustainable at 179% of GDP and has expressed reluctance to participate in further bailout funding without a specific debt relief agreement.

European Union lenders, on the other hand, have so far ruled out forgiving the debt, and they refused to discuss such things as cutting repayment rates until after a reform-for-cash deal is established. These two key parties acting as Greek creditors hold markedly differing views about what Greece is capable of sustaining.

For its part, the Greek government claimed that Tuesday's agreement would now open the way for debt relief to proceed and that, with such debt relief, the country may be able exit from bailouts.

What message does this send? Why should Greece, which has been so profligate in the past, be given such sweeping relief when the mess is entirely of its own making?

Who joined the Eurozone despite not being financially compliant?  Who gorged itself on vast binges of borrowing? Who is responsible? 

The answer to these questions is, of course, Greece. If Greece wanted to join the euro club, it should have lived by the rules. Since it could not obey the rules, it should have been shown the door. The time and money wasted on the Greek situation is infuriating.

Why is Greece being rewarded? Jeroen Dijsselbloem, head of the Eurogroup of finance ministers, said Greece’s creditors would still be prepared to ease terms of Greece’s debt further, if the country continues to cooperate on reforms. “Cooperate”?

Greek monument
 Defiant Greece. Detail from Alexander the Great monument 
in Thessaloniki. Image: Shutterstock

Greece has only ever grudgingly made concessions. It has dragged its feet on reform on every occasion and only yielded to privatisation and the liberalisation of internal markets in a kicking and screaming manner.

Every measure of reform obtained from Greece has been wrung out amid protest and defiance. There has been no courage from the EU over the past eight years to say "here are the terms...take them or leave".

In dealing with Greece, there has been a total abandonment of the foundation of the euro in the Maastricht Treaty — that there would be no bail-out of a country that got into fiscal trouble.

European policymakers have repeatedly shifted into frantic overdrive as politicians have repeatedly refused to accept the naked truth that Greece was bust. So they have scrambled to save what integrity is left for the euro (not much) and prevent Greece from financial meltdown.

What is a “primary surplus”?

The Greek defiance last year was based on the view that the EU Commission said Athens had attained a primary surplus of 0.7% of GDP in 2015 based on Eurostat data, comfortably beating a target for a 0.25% deficit.

A key concept for grasping the Eurozone sovereign debt crisis is the idea of a budget that's in "primary surplus." This means that tax revenues exceed planned state spending.

Put it another way, if one ignores interest on outstanding debt, the country can afford to finance its current spending. Excuse me? If a nation was bold enough borrow on the open capital market, then surely it should be big enough to pay its debt, or borrow again to roll over the debt.

Surely the risk must be weighed as illustrated here.
Greece
Source: Spotlight Ideas

The issues raised in the diagram above can be summed up as follows: 

• Greek government spending was €107.8 billion in Q4 2016.
• Greek government receipts were €144.7 billion in Q4 2016.
• Greece has a primary surplus.
• Greece had government debt of €326.4 billion at the end of 2016.
• Greece had government debt equivalent to 179% of GDP in 2016.
• Debt servicing or interest charges each year are €11.2 billion.
• Moody's Caa3,  S&P CCC+, Fitch CCC

The last line above shows the credit ratings assigned to Greece by the three major credit rating agencies. These ratings imply that the sovereign risk of Greece is regarded as:

• Substantial.
• Extremely speculative.
• At risk of imminent default with little prospect of recovery.

So my view is that if any private investor, be they an institution or an individual, chooses to take on a debt exposure as risky as Greece, that they have to live by the maxim “caveat emptor”, or “let the buyer beware”.

The reason for being wary is that while Greece may have claimed a primary surplus in the past two years, that does not imply Greece is great shape. There are interest obligations to pay, worth 7.7% of government receipts, and so, in striving to meet the debt servicing cost, Greece could reduce expenditure, i.e. engage in austerity which it has done. If this is not enough, it could declare bankruptcy or seek to refinance the debt by engaging in a bailout.

Alexis Tsipras
 Greek prime minister Alexis Tsipras vowed no more 
austerity. Photo: Shutterstock

No credibility

How can Tsipras stand up in parliament and claim any credibility? He said no further pension cuts, and yet now Athens has promised to cut pensions in 2019 and cut the tax-free threshold in 2020.

After refusing to do so, Athens has agreed to sell coal-fired plants and coal mines equal to about 40% of its dominant power utility, Public Power Corporation. No, it is now time to privatise it all.

When it comes to debt relief, one wonders what hair-brained scheme will be cooked up. I ask you to consider the earlier diagram. Investors acquired Greek debt because they wanted to enjoy the spread over the Eurozone core.

But isn’t it the most basic fact of asset allocation that one must consider the “risk/reward” payoff? Higher spreads are tied to higher risk; they rolled the dice, made their investments, and, in case of default on that debt, they should pay the price. It seems ludicrous that ever more capital would be forwarded to Greece and no one would accept the pain of cavalier investment actions.

I suggest we forget all the linguistic niceties. It's time to tell it as it really is. Private-sector investors are not going to get back the money they invested at the due date. So, even if Greece gets debt relief, investors will have to scramble to roll over the debt, swap old into new debt, or simply take a massive loss on the original principal.

These three courses of action are acts of “credit impairment”, and so the crediting rating agencies are being too generous in their ratings of Greece. They would be fully justified in moving Greece to “SD” i.e. “sovereign default”.

What is sure is that whatever deal is done to let Greece pay its debts in July, the creditors and the Greek negotiators will be back asking for more accommodation and forgiveness in three months’ time.


— Edited by John Acher


Stephen Pope is managing partner at Spotlight Ideas

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