Greece and the Eurozone have entered into what amounts to a letter of intent in the form of a memo released yesterday. It’s important to understand, even as a basis for further negotiations, what this document is and is not. Because this is not a definitive agreement, as in it explicitly states that Greece’s detailed structural reform proposals must be reviewed and approved by “the institutions,” the new name for the Troika, as well as approval by the Eurogroup finance ministers before any funds are released, there is still uncertainty as to how its deliberate ambiguity will be resolved.
There is no way of putting a pretty face on this document. It represents a huge climbdown for Syriza. Despite loud promises otherwise, they’ve agreed to take bailout funds, and the top and the close of the memo confirm that the baillout framework is still operative (emphasis ours):
The Eurogroup notes, in the framework of the existing arrangement, the request from the Greek authorities for an extension of the Master Financial Assistance Facility Agreement (MFFA), which is underpinned by a set of commitments. The purpose of the extension is the successful completion of the review on the basis of the conditions in the current arrangement, making best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions…
We remain committed to provide adequate support to Greece until it has regained full market access as long as it honours its commitments within the agreed framework.
Even writers who take a positive view of what Syriza accomplished are under no illusion as to how far short Syriza has fallen relative to its lofty promises. From Paul Mason’s blog:
I asked Dijsselbloem in the press conference: “What do you say to the Greek people, whose democracy you’ve just trashed.” He replied that he did not think that was a very objective question. We’ll have to agree to differ.
There is also language in the memo that looks to authorize the return of the Troika monitors: “In this context, the Greek authorities undertake to make best use of the continued provision of technical assistance.” The Financial Times reads it the same way:
It also leaves the IMF and EU institutions — the European Central Bank and European Commission — in control of evaluating Greece’s economic reform measures and the disbursement of bailout funds, despite Mr Tsipras’ vow to rid Greece of the hated “troika” of bailout monitors.
Mind you, despite the foregoing, it is doubtful that Greece could have done much better, particularly in light of the way the ECB had worked to intensify the already-in-progress bank run and boxed the Greek government in by giving it only a thin increase in the ELA limits. A contact told me the Greek government would have had to impose capital controls over the weekend in the absence of a deal; the Financial Times reported close to the same thing by stating that Greece was on track to hit the limits of the ELA on Tuesday (the day after a long holiday weekend). And let us not forget that the Greek government is also slotted to run out of cash by February 24.
Some commentators have claimed a victory of sorts, in that the negotiations have now been moved out of the Eurogroup and into the Troika’s hands, and thus the fractious Wolfgang Schauble is out of the picture. But this is more complicated than it seems.
On the one hand, the gambit that was devised by Finland, of insisting on a February 28 deadline for the current bailout as a way to pressure Greece, did not work out quite as planned. The intent was to force Greece to submit to the current parameters. Due to Greece’s insistence on negotiating, and the inefficiency and cumbersomeness of doing that in the Eurogroup framework versus the rigid February 28 date, the parameters have been narrowed and the negotiations have been shifted to a smaller group less in the public eye. And the Troika team is likely composed of better negotiators too (politicians and CEOs routinely overestimate their negotiating skills; unless they are in an industry where they do this all the time, they are better letter real pros do the job for them. It also did not help that relations between Varoufakis and Schauble had deteriorated to the point that they could not be in the same room and Djisselbloem, Lagarde, and other officials had to shuttle between them on Friday). So one might argue that Greece being able to negotiate anything at all is a win.
On the other, Greece is not at all out of the Eurogroup woods. One of the key provisions is that Greece submit a list of its detailed structural reform proposals by Monday evening. The Financial Times points out that if that list is deemed to be still too vague or has elements that might be seen as overreaching, the Eurogroup could still come back to mix things up:
The new Greek government is to submit those measures for review to the International Monetary Fund and EU institutions on Monday, and officials said if they were not adequate another eurogroup meeting could be called on Tuesday.
There is another way the deal could go pear shaped. Recall that the extension requires the approval of all the 19 countries represented in the Eurogroup. For Finland and Germany, parliamentary approval is required. The German press is already muttering about the deal and Schauble said he’d have to work to sell it. Now that may simply be talk, but even if the Troika gives the Monday submission a pass, if the Finnish or German press takes a serious dislike to it, there is a possibility of a parliamentary turn-down. Mind you, that’s low odds, say in the 5% range, but that is still awfully high for a tail risk.
In addition, given that the structural reform package is subject to Eurogroup approval, the Troika negotiators are likely to be sensitive to their views. Expect informal consultation between the negotiating group and the key Eurogroup ministries.
A negative for the Greek side is a short negotiating runway. In theory, they have until the end of April to work out a structural reform program that is acceptable to the Troika. But Greece gets no bailout funds until those reforms are approved by the Troika and the Eurogroup. Ekathimerini reported last week that the Greek government runs out of cash on February 24. It might be able to extend that by a few weeks by delaying payments. The need to come up with an acceptable reform package as soon as possible means little to no time for trying to devise clever compromises or work-arounds for issues that the Troika objects to.
Another issue is that the Greek side seems to be taking verbal promises made outside the memo seriously. As with the Moscovici memo, anything that has not been formally agreed to can’t be assumed to be operative. For instance, CEPR (hat tip Kim Kauffman) declares, Greek Bailout Extension Deal Represents a “Significant Retreat” by the European Authorities. Yet their conclusion rests on items not in the memo. For instance:
But the agreement gives Greece fiscal flexibility, lowering previous fiscal surplus constraints. Bloomberg cited a Greek official as saying that tax increases and cuts to pensions were not part of the agreement.
Note that the memo does not in fact lower the surplus targets. It has fudge language: “The institutions will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account.” Any change is for this year only. The target is set to increase from 1.5% now to 3.0% this year (I have not seen any exact language as to how that is supposed to kick in) and 4.5% in 2016. Pretty much everyone who is not part of the diehard austerity camp regards the increases as insane. But on paper, the targets are still in place, with it up to the Troika to determine what if any relief is offered.
Moreover, given that tax receipts are running well below anticipated levels, due apparently to citizens not paying taxes as a result of the Syriza win (?!?), putting Greece already behind the budgetary eight ball, it is not clear what the Troika will do.
And note that the fact that specifics like tax increases and pensions are indeed not part of the agreement does not necessarily mean that they are not on. As Macropolis points out, the Troika has reneged on written commitments to Greece:
On November 27 2012, the Eurogroup agreed to provide further debt relief to Greece once it achieved a primary surplus…
Despite this commitment and even though Greece achieved a primary surplus in 2013, a year ahead of schedule, no measures on further debt relief were offered. The previous government was told at the end of 2013 to wait until the primary surplus was rubber stamped by Eurostat in March. Then, it was told to wait until after the European Parliament elections in May. Then, it was told to wait until after the completion of the troika review that began last September. Greece’s lenders attempted to cover their reluctance with the fig leaf of claims that Greek debt was on a sustainable path.
And there’s more reason to be concerned that promises made verbally might not be observed. Again, remember the process. The initial negotiating team is not the one that will be handling the review of the structural reform proposals. When I’ve been in negotiations, even when one person on a team has been switched (say due to a serious illness), if the new person is senior and the negotiations are not in the final stages, they often revisit issues that had been deemed as settled. Here we have an entire new group coming in, and with set idea from previous experience of what structural reform programs look like and set approaches for evaluating them. Now admittedly a lot of this uncertainty will reduced when we see how the Troika team responds to the Syriza proposals, but I’d urge caution on this front.
Most commentators have focused on Syriza’s hope of replacing some of the structural reform issues that it views as counterproductive, like fire sale privatizations and pension cuts, with ones it views as positive, such as strengthening unions, increasing the minimum wage, and implementing programs to hire 300,000 people.
If Syriza is able to get the privatizations halted and preserve pensions, those would be seen domestically as meaningful victories. But the Troika and the Eurogroup most of all want Greece to show how it will improve tax collections and make good on its promises of cracking down on the oligarchs. If I were in there shoes, I’d insist on seeing meaningful progress on that front before I relented on the structural reform changes that Syriza wants. We aren’t the only ones to see it that way:
— Yannis Koutsomitis (@YanniKouts) February 21, 2015
Notice the list of reform priorities, according to the Greek side, per ekathimerini:
The official added that the SYRIZA-led government will unveil reforms for the interim period, giving priority to those where there is common ground with other eurozone members – “meaning curbing tax evasion and corruption, public sector reform and dealing with the humanitarian crisis.”
Notice what seems to be off the list? All of the wage-boosting labor market measures that Syriza promised, like increasing labor bargaining rights and funding more hiring.
And how can Syriza possibly fix a broken tax system (for starters) in four months? They’ve barely been in office, they have no experience governing and have been so busy with the negotiations that they have yet to take effective control of the bureaucracies. The continuing negotiations will cut into scarce time to make changes (as in you can’t make changes until you’ve agreed to them, and having to get them approved by the Troika and then by the Eurogroup makes it harder to get going). Moreover, the tax change that would likely be most convincing to the Troika (as in it would to the most to solve the problem of the high level of use of cash and tax evasion in Greece) would be to increase the VAT and/roor figure out how to reduce avoidance. That might involve mapping information from VAT reporting against business incomes, which would take time to figure out and implement. And how do you deal with businesses that deal only in cash, which appears to be a large part of the problem that tax pros call base erosion?
Admittedly, Varufakis has emphasized that he is not required to increase the VAT, but that would seem to be the fastest way to establish credibility with, as in placate, the Troika.
Yet even if Syriza were to do something as persuasive to the Troika but unpopular to its citizens effectively increase the VAT, say by by making reporting and information analysis far more stringent, it’s unlikely they’d be anywhere further than the advanced planning stages by June. Would that be convincing enough?
Now multiply that issue alone by how many other reforms Syriza is going to promise to implement to improve efficiency and raise revenues.
As noted earlier, another area that could be a win for Syriza is on the fiscal surplus target. But this is less of a victory even if it comes to pass, than most observers assume. The surplus target was widely expected to be negotiated, and most observers also anticipated de facto reductions in the debt through an extension of maturities and a possible further reduction in interest rates. So again, the waffle language in the memo really is not all that meaningful a statement. What matters is the concession that Syriza gets. As reader Alan pointed out:
“They were always expected to be negotiated” just as there would be a negotiation on the debt once Greece achieved a primary surplus (not just expected but an actual agreed commitment). The previous government made a few hints on both those points when they were delivering the “success story” line and they got nothing, just as they expected. If Syriza does get the 1.5% it will be huge and PASOK and ND are terrified about this. This alone will mean something like 20+ bn in the next 4 years.
In sum, it looks very likely that the top priority of the Troika will be to get Syriza to delineate in detail what they intend to do in the way of the 70% of the structural reforms that Varoufakis said that they and his counterparts already agreed to, and only throw a few bones on the humanitarian front out of the other 30% that Varoufakis wants. And if you’ve ever been party to legal agreements, more specific commitments operate to the disadvantage of the party making them.
Moreover, Syriza has already shown a propensity to overpromise and underdeliver. That would be likely to happen independent of what looks like an optimism bias among the leadership team merely by virtue of inexperience, as in underestimating how long it takes to change bureaucracies and design and launch programs.
As I have said, I would be delighted to be wrong, but even if the ambiguities in the memo language all resolve in Syriza’s favor, they have a mammoth task in what is achieving what is set forth in it, and an uphill battle in meeting the Troika’s and the Eurogroup’s reform expectations. I wish the Greek government the best of luck.
Update 7:30 AM. Some readers charged us with being unduly pessimistic about the deal. Robert Peston at the BBC if anything manages to be more downbeat:
In fact, what was agreed on Friday night guarantees there will be no fresh crisis – no fears of Greece quitting the eurozone – for a full two days.
Because by Monday night, the Syriza government has to submit a preliminary list of proposed economic reforms – which will form the basis of negotiations till the end of April on a new financial settlement for the country.
If the Eurogroup were to reject that preliminary list, well in theory all bets would be off – and we would be back to wondering whether Greece is in or out of the euro.