Last night saw something extraordinary take place in the Greek bailout saga and let’s face it we are relatively numb to such things after everything which has taken place. It did not surprise me that the Greek government made a proposal to the Euro area authorities but what they put in it did. So let us take a look at what has been offered.
The Greek Proposal
The new Finance Minister opens by implicitly agreeing to further doses of austerity. From Kathimerini.
The new fiscal path is premised on a primary surplus target of (1, 2, 3), and 3.5 percent of GDP in 2015, 2016, 2017 and 2018.
This of course immediately begs the question of how Greece can possibly achieve this – as after all such measures before have led it into a depressionary cycle as austerity shrinks the economy leading to a need for more austerity and repeat – so let us look at the plan.
Adopt legislation to reform the VAT system that will be effective as of July 1, 2015. The reform will target a net revenue gain of 1 percent of GDP on an annual basis from parametric changes.
If we look into the detail we see moves that so far the Syriza government in Greece has rejected.
The new VAT system will: (i) unify the rates at a standard 23 percent rate., which will include restaurants and catering…….. Eliminate discounts on islands, starting with the islands with higher incomes and which are the most popular tourist destinations, except the most remote ones. This will be completed by end-2016,
You might think that Greek businesses have been having a hard enough time especially as they have to sell products at a higher price due to the VAT increase but they too face higher taxes.
raise the corporate tax rate from 26% to 28%;
The other issue that is constantly in the news is the Greek pension system and reforms are planned here too.
Effective from July 1, 2015 the authorities will phase-in reforms that would deliver estimated permanent savings of ¼-½ percent of GDP in 2015 and 1 percent of GDP on a full year basis in 2016 and thereafter…
This includes changes to the retirement age which have become de rigueur pretty much everywhere it feels in the credit crunch era.
a gradual elimination of grandfathering to statutory retirement age and early retirement pathways progressively adapting to the limit of statutory retirement age of 67 years, or 62 and 40 years of contributions by 2022.
Also Greek pensioners will have to pay more for healthcare.
increase the health contributions for pensioners from 4% to 6% on average and extend it to supplementary pensions
One other surprising factor was a promise to cut defence spending. What no more French frigates and German submarines?
reduce the expenditure ceiling for military spending by €100 million in 2015 and by €200 million in 2016 with a targeted set of actions, including a reduction in headcount and procurement;
Also we saw promises of privatisations which may be the most tenuous section of all as the record so far on this subject has been patchy at best.
What about the referendum result and Oxi?
It was only on Monday that I welcomed a flowering of democracy whereas the events of last night have seen that flower wilt. Below is an example of the terms rejected in last weekend’s referendum.
The (VAT) reform will target a net revenue gain of 0.741%
You may note that the new proposal involves more of a tightening of the VAT noose around the neck of the Greek economy than the referendum rejected! Indeed we are left wondering what the point of the referendum was as whilst there are minor differences in essence this is an acceptance of the original plan from the creditors/institutions. Another awkward point is that the offer was withdrawn over a week ago and back then the Greek government was calling the institutions “terrorists” for even suggesting it. How times change!
What about the Greek economy?
We can only fear what the recent turmoil and bank closures have done to the Greek economy but we do get something of a hint from today’s economic data.
The Production Index in Industry (IPI), according to working day adjusted data, in May 2015 compared with May 2014 recorded a decrease of 4.0%……Manufacturing production decreased by 2.7%.
This is a turnaround for manufacturing production as up until May it had been increasing in 2015 so far. We also get an idea of the scale of Greece’s economic depression when we note that the underlying indices set at 100 in 2010 are now 86.2 for industrial production and 90.3 for manufacturing.
Yesterday we also were updated on the way that in this crisis cars are potentially being used as an ersatz type of cash.
The Hellenic Statistical Authority announces that in June 2015, 12.751 road motor cars (both new and used from abroad) were put into circulation for the first time, recording a 21,7% increase compared with the corresponding month of 2014.
What will such a proposal do to the Greek economy?
Back on the 25th of June I pointed out what such an austerity package would do to the Greek economy.
However its analysis of the impact of a fiscal consolidation has a chilling implication for the austerity package which the Greek government has just proposed. The impact will be to reduce GDP by 1.5% to 2% this year and to reduce it by 3-4% next year!
This is based on the latest IMF estimates of the impact of austerity packages so far on the Greek economy. So we can expect another downwards spiral in an economy which has already seen so many of them.
What will Greece get in return?
In a nutshell more debt. From Bloomberg.
The government of Greek Prime Minister Alexis Tsipras sought a three-year bailout loan of at least 53.5 billion euros ($59.2 billion), in a last-ditch effort to keep the country in the euro.
Also they want funding from the (Jean-Claude) Juncker Plan which even he seemed to regard as a fantasy.
a package of growth measures of 35 billion euros.
Perhaps they were attracted by this from his original statement.
I have a vision of school children in Thessaloniki walking into a brand new classroom, decked out with computers.
Back on the 26th of November last year I pointed out a fundamental problem with this plan.
The EU Commission is only putting up £8 billion of actual cash at which point we have a leverage rate of 39. That is a little different to the implied leverage ratio of 3 is it not? If we include the capital provided by the European Investment Bank or EIB we reduce the leverage ratio to 25.
So we have funding from a fantasy plan and yet more debt piled on top of Greece’s existing burden. I will leave it to readers to decide if more debt over 3 years is better or worse than more debt over 4 months as others are claiming.
That is a counterpoint to the claims that some form of debt restructuring will be provided. It sounds good but what happened last time. Here is the sugar-coated version from Oliver Blanchard of the IMF.
The 2012 private sector involvement (PSI) operation led to a haircut of more than 50% on about €200 billion of privately held debt, so leading to a decrease in debt of over €100 billion (to be concrete, a reduction of debt of 10,000 euros per Greek citizen).
In fact it was so good they now owe even more. Oh hang on……!
As we stand it would appear that the Syriza government is applying the lyrics of Clean Bandit to its membership of the Euro area.
When I am with you, there’s no place I’d rather be, yeah
Along the way it looks as though it has sold out the Greek voters 61% of whom voted against what it has now accepted. So it would appear that even the words No and Yes need to go into my financial lexicon for these times.
We may yet see a type of debt restructuring that Olivier Blanchard of the IMF referred to yesterday.
Look at it this way: Cash interest payments on Greek debt last year amounted to 6 billion euros (3.2% of GDP), compared to 12 billion euros in 2009.
Interest-rates have been cut (after initially imposing penal ones..) and maturities extended along the lines of my original suggestion that eventually the bonds would have a maturity date of infinity.
In essence it would appear that the Greek government has looked at what is perceived as the dark and decided to sing along to the hit of the summer.
Blow a kiss, fire a gun
We need someone to lean on
Blow a kiss, fire a gun
All we need is somebody to lean on
If any of this actually worked we would not be here would we? It also looks like a victory for bullying and intimidation to me. Even worse this was applied by the central bank (ECB) as it closed down the banking sector. Lender of Last Resort anyone?