Wednesday 24 June 2015

The Greek tragedy - 06/23/2015

The heads of small sovereign states are summoned by the Big Guys these days
Tsipras summoned to Brussels for emergency talks over Greek bailout deal

24 June, 2015

Greece’s prime minister, Alexis Tsipras, is to travel to Brussels on Wednesday for critical talks with the country’s creditors as the outlines of the latest proposed deal to avoid bankruptcy threatened to unravel, worsening the intractable crisis.

In advance of the third meeting of eurozone finance ministers in less than a week, Tsipras was summoned to the office of Jean-Claude Juncker, the president of the European commission, to try to thrash out remaining differences.

Christine Lagarde, the head of the International Monetary Fund, Mario Draghi, the president of the European Central Bank, and Jeroen Dijsselbloem, the Dutch finance minister who runs the Eurogroup committee of finance ministers, are to confront Tsipras over his tax raises and spending cuts tabled on Monday in the hope of securing more bailout funds and avoiding default next week.

Wednesday’s Eurogroup meeting was aimed at preparing an agreement that would be rubber-stamped by an EU summit on Thursday, averting the eurozone’s first default next Tuesday and keeping the currency bloc intact.

But the mild euphoria that characterised frantic diplomacy and another eurozone summit in Brussels on Monday dissolved swiftly on Tuesday as it became clear that Lagarde found the proposed temporary resolution inadequate and that German chancellor Angela Merkel was also having second thoughts.

Juncker and the commission want to strike a deal, but are essentially mediators with no money at stake in the five-month stand-off which appeared to have reached a breakthrough on Monday.

Lagarde, who kept a low profile at the summit, was said to have strong reservations about the proposed agreement on ideological terms opposed to the hard-left Tsipras government, but also because she does not think the putative agreement will put Greece on the road to recovery.

Sources familiar with Merkel’s thinking said the German leader faced a potential party revolt over extending a further lifeline to Greece without confidence it would succeed.

There is little faith in Germany and among the other creditors in Tsipras and his finance minister, Yanis Varoufakis.

Greece’s eurozone bailout expires next Tuesday when it is also due to repay €1.6bn to the IMF. But there were growing signs on Tuesday that the creditors would not be rushed into a deal they view as inadequate.

Senior eurozone sources said the IMF payment on Tuesday could be easily fixed and that Tsipras might have to call a referendum in Greece on whether to stay in the euro.

The sudden switch from hope to gloom is likely to affect the financial markets and reverse the mini-boom euphoria of the past two days while accelerating bank run tendencies and raising the pressure for the imposition of capital controls.

Greek insiders described the Tsipras summons to Brussels as “a very critical meeting”. “It is not a good sign,” said veteran political commentator Pavlos Tzimas.

As doubts deepened among the creditors, the Greek government came under intense domestic political pressure last night over its concessions. Tsipras faced criticism from within his coalition government over compromise proposals that would raise €8bn by increasing pension contributions, phasing out early retirement, hiking corporation tax and raising some rates of VAT.

Many MPs, be they on the left or not, are very sceptical about accepting such a programme,” said Costas Lapavitsas, an economics professor at the University of London who is now an MP for Tsipras’s leftwing Syriza party. “How will they explain it to their voters? How will they return to their electoral constituencies and explain this agreement to them?”

The government’s junior coalition partner, the small, rightwing Independent Greeks party, added to the complications for Tsipras by warning it would only support an agreement that included some form of debt write-off. Greece’s creditors are not expected to make such a commitment this week. Panos Kammenos, Anel’s leader, added that his party would oppose a VAT increase for Greek islands “even if the government falls”.

By Tuesday night it was unclear whether the Greek leader would be able to contain the dissent or even pass an agreement through parliament, regardless of whether a deal is reached in Brussels.

Any deal would have to be endorsed by a working majority in parliament, with a close Tsipras ally also suggesting that fresh elections or a referendum may be needed if an agreement is not voted through.

Alekos Flambouraris, a senior government minister, said: “For the government to forge ahead in difficult conditions after the agreement and to restart the economy and kick-start the country’s productive reconstruction, it has to have a unanimous parliamentary group which will put the programme into effect.”

Earlier on Tuesday, the European Central Bank agreed to inject nearly €1bn into the Greek banking system, the third consecutive working day that Greece has received emergency help from the ECB’s emergency liquidity assistance programme in order to stave off bankruptcy as depositors take billions of euros out of accounts.

The Irish finance minister, Michael Noonan, whose country has successfully completed its bailout programme and returned to growth, warned that emergency funding for Greece’s banks could be cut off unless a deal is reached soon.
The European commission is also dangling the prospect of €35bn in financial aid for Greece if a deal is made. “I want ordinary Greeks to know we are offering €35bn to help the economy,” said Juncker.

Earlier, optimism among investors that Greece would avoid a chaotic default boosted stock markets. Greece’s main index ended the day up more than 6%, while the French and German exchanges gained more than 1.2% and 0.7% respectively. In London, the FTSE 100 was flat, while Japan’s Nikkei index hit a 15-year high.

FILE PHOTO: Riot policemen stand between anti-austerity and pro-EU protesters in front of the parliament building during a rally calling on the government to clinch a deal with its international creditors and secure Greece's future in the Eurozone, in Athens, Greece, June 22, 2015. (Reuters / Yannis Behrakis)

Angry pensioners have hit the streets of the Greek capital, protesting against the reports of a new austerity plan being ushered onto them. It comes as Greece and its lenders debate the nation's €240 billion debt.

The price of averting Greece’s exit from the euro, and even the European Union, is further painful austerity – surely a recipe for social turmoil

Why The IMF Will Reject The Latest Greek Proposal In Just Two Numbers

As we summarized earlier, the latest "final" Greek proposal is in trouble: it may very well not pass the Greek parliament due to mounting objections among all parties not least in Tsipras' own Syriza. But a Greek parliament vote on the decision may be moot: according to Bloomberg, Tsipras will fly to Brussels on Wednesday, where he will meet the heads of the Troika: Draghi, Juncker and, of course, Christine Lagarde.

It is the IMF's head that will tell Greece to go back to the drawing board.
Recall that as the WSJ reported, "the Washington-based IMF has said Greece’s economy is already too heavily taxedand that too many additional tax increases would hurt economic growth, making it harder to pay down Greece’s debt."

Also recall that as IMF's Olivier Blanchard explicitly demanded, Greece needs to cut spending, not hike taxes - which it has patently demonstrated it is incapable of collecting - and especially pensions: "Why insist on pensions?Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners."

So why will the IMF throw up all over the latest Greek proposal in just two numbers? Here is the answer, courtesy of Kathimerini:

The proposals contain 7.9 billion euros of measures, of which 7.3 are from increases to tax and social security contributions.
The IMF demands no tax hikes and pension cuts. Instead it will get almost exclusively tax hikes, amounting to 92% of the proposed measures, and just a few cuts, few of which actually impact Greek pensions. In short: the proposal is not only unsustainable, it is also unenforceable, something which the Germans - already facing a third Greek bailout - will be quick to point out.

Which is why tomorrow, after Tsipras is finished with the meeting with the Troika, he will have a new homework assignment: revise the "final final" proposal and come up with much less in tax hikes, much more in spending cuts:something which the already furious hard-line elements within Syriza will have a field day with.

Then again, we already knew all of that:
And all this takes place just 7 days before the Greek payment to the IMF is officially due, at which point Greece may or may not be declared in default, but when the ECB will no longer be able to say Greece is compliant with the terms of its bailout program and will have no choice but to yank the ELA.

Full Greek proposal below (pdf link).

Most taxpayers have chosen to delay their payments, given that the positions of the two main parties leading the election polls are diametrically opposite: Poll leader SYRIZA promises to cancel the ENFIA and even write off bad loans, while ruling New Democracy acknowledges the difficulties but is avoiding raising issues that would generate problems and fiscal consequences.

The dwindling state revenues will not only hamper the next government’s fiscal moves, but, given that the fiscal gap will expand, also negotiations with the country’s creditors. The Finance Ministry will have to make plans for new measures and make sure that salaries, pensions and operating expenses are covered, especially in case the creditors do not pay the bailout installments which are already overdue.

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