Greece: The gathering storm

Greece's PM Alexis Tsipras

There are several reasons to begin bracing for the turbulence ahead. One is that the new Greek government is still on a steep learning curve and is liable to make slip-ups. It’s apparent determination not to keep its own counsel and the tendency for its ministers to speak into any and all microphones put in front of them is compounding the problems it faces.

On Wednesday, three ministers gave three different messages about what the government plans to do with VAT. On the same day, Finance Minister Yanis Varoufakis suggested that Greece would have trouble paying its 1.6-billion-euro loan repayment to the International Monetary Fund, while Economy Minister Giorgos Stathakis insisted that the government did not have any funding problems. A day later, State Minister Alekos Flambouraris indicated that the government might indeed be unable to pay the IMF in full and could ask for part of the repayment to be delayed.

This picture of confusion is in contrast to the persistently blunt message being broadcast from German Finance Minister Wolfgang Schaeuble. After rubbing salt into the Greek side’s wounds after the Eurogroup deal on February 20, when he wondered aloud how Varoufakis would explain the agreement in Athens, the German politician has maintained extreme pressure on the SYRIZA–Independent Greeks coalition. Ahead of the vote in the German Parliament, he insisted that no money would be released to Greece unless it completes the review and made it clear that failure to live up to the terms would lead to the agreement being declared null and void.

Schaeuble also accused Varoufakis of “straining the solidarity of European partners”. It was just one of several personal jibes from the German minister towards his Greek counterpart. These comments carry dual significance. Firstly, because Schaeuble sets the tone for the rest of the Eurogroup, as underlined by the fact that Eurogroup chief Jeroen Dijsselbloem, European Commissioner Pierre Moscovici and IMF managing director Christine Lagarde negotiated on February 20 with Varoufakis in one room and Schaeuble in another to thrash out a deal before the meeting of the eurozone finance ministers began.

Schaeuble’s insistence is also significant because it gives an idea of how fraught the process of implementing the agreed reforms and then having them reviewed by lenders is going to be for Greece over the next four months. Since the beginning of the bailout process in 2010, Germany has turned towards the IMF to act as its enforcer on the ground, believing that the European Central Bank and the European Commission do not have the expertise or resolve to ensure that terms are being met. The way that Schaeuble appeared to try to sideline the Commission’s efforts to find a compromise with the Greek government before February 20 suggests that these reservations still exist in Berlin. This means Schaeuble and German Chancellor Angela Merkel are likely to turn to the IMF again over the next few months to ensure that they are getting their money’s worth from the coalition in Athens. This is where the next concern about how the process will evolve over the next few months arises.

While the Commission, the Eurogroup and the ECB signed off relatively easily on the reform package proposed by the Greek government on February 23, the IMF adopted a more dissenting line. In her response to the proposals, Lagarde recognised the Greek proposals as a “valid starting point” but raised a number of concerns about elements that appeared to be missing or were not covered in enough detail. These included reforms for pensions, VAT, opening up closed sectors, privatisations and the labour market – all of which are political hot potatoes in Greece.

“As you know, we consider such commitments and undertakings to be critical for Greece’s ability to meet the basic objectives of its Fund-supported program, which is why these are the areas subject to most of the structural benchmarks agreed with the Fund,” added Lagarde, indicating that regardless of what the new government has agreed with the Eurogroup, the IMF will still be looking for Greece to deliver in areas where the previous coalition failed.

Lagarde’s response seems to leave only limited room for flexibility and suggests that the government will be asked to delve into a lot of areas that it would prefer to leave untouched at this stage given the already fragile state of unity within SYRIZA. However, the way the Fund, driven by rules and procedures, works means that Athens will have to meet specific structural benchmarks before it can qualify for further loans. This means the current coalition cannot escape the nightmarish reviews that its predecessor approach with a mixture of dread and panic if it expects to receive the IMF’s 3.5 billion euros from the total of 7.2 billion in pending instalments.

Schaeuble, meanwhile, has insisted that Greece will not get a cent of the remaining part of the tranches if it does not complete the review. This ties Athens down to the incredibly testing process of working with lenders to draft and pass legislation so the review can be wrapped up. At the same time, it will have to ensure that it does not alienate creditors by adopting measures that run counter to their goals. There has already been some friction over privatisation, payment plans for overdue taxes and plans for the settlement of non-performing loans. Also, the various sides have not yet sat down to discuss the complex and extremely technical issue of the fiscal gap and any relevant measures that need to be taken.

All this forms an extremely challenging environment for the new government, which has no experience of this process and will also have to launch, in parallel, discussions about what kind of package can be agreed to carry Greece on from July, when the current four-month extension ends. This suggests the next four months will be the most definitive period of the Greek crisis.

Follow Nick on Twitter: @NickMalkoutzis



About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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