Some fans of the Greek ruling coalition argued that it had become increasingly intransigent over recent months to pave the way for a default and/or Grexit, that it was not simply playing a game of chicken with its creditors but was working to create a set of conditions that would force a radical rupture in a way that it could tell voters that it had clean hands.
This 11th dimensional chess theory of Greek negotiations appears to be invalid. Both the Guardian and the Wall Street Journal are separately reporting that members of the Tsipras government are working on plans that amounts to capitulation on the most contested creditor demands: that of pension and labor market “reforms,” as in large pension cuts and changes to market regulations that reduce worker bargaining power.
Now it may turn out the Syriza offer is deemed to be too small, too deferred, and/or too cosmetic to satisfy the Troika and the European governments that must approve any bailout extension (we are now so close to the expiration of the second bailout on June 30 that it is now too late to get a deal approved by then. But since IMF chief Christine Lagarde has 30 days before she has to report a Greek non-payment of €1.5 billion on June 30 to her board, the real drop dead date appears to be July 20, when a €3.5 billion payment is due to the ECB). And since the Syriza cabinet is apparently hashing out details now, any media reports are on discussions in progress, and not a final plan.
Note that Tsipras has yet to sign off on a proposal key members of the government are devising. However, note that they would not be working on a proposal to, as the IMF demanded, “make the numbers work” without a go-ahead from him to try to close the gap. And also remember that last week, in a proposal the Troika rejected, Greece agree to meet their primary surplus demands of 1.0% of GDP this year, rising to the insane level of 3.5% by 2018 and thereafter. Last week’s plan from Greece was kicked back because the Greek negotiators freely admitted their reform proposals failed to meet those levels.
Nevertheless, the Greek government is apparently now willing to cross its famed red lines. And the Wall Street Journal indicates that that includes significant, as in non-cosmetic reductions in pensions.
Among the measures that the Syriza-led coalition was reportedly working on on Saturday were reductions in early retirement schemes. Pension and VAT reforms, along with labour deregulation, remain sources of friction between the two sides.
Macropolis similarly states that local sources state the the Greek government is devising plans that include pension “reforms”:
State Minister Alekos Flambouraris confirmed on Saturday reports that the Finance Ministry is reworking Greece’s positions in time for Monday’s Eurogroup, which will be followed by the eurozone leaders’ meeting in the evening. Local media reports suggest that ministry officials are reworking proposals on changes to VAT, as well as pension reform in a bid to get as close as possible to the institutions’ targets.
The Wall Street Journal provides more detail:
Government members are putting together a plan they hope would achieve budget targets that bailout creditors want, while relying more on eliminating tax breaks and less on pension cuts than the lenders’ own proposal, the officials said.
The Greek cabinet is due to discuss the proposal on Sunday morning. It isn’t clear whether the cabinet under Prime Minister Alexis Tsipras will endorse the plan, which was being prepared on the weekend by Deputy Prime Minister Yannis Dragasakis and others who are considered among the more pragmatic members of the leftist Syriza-led government….
The new Greek proposals include elimination of many tax breaks, including scrapping exemptions on taxes on income from labor and capital, as well as levies on fuel, retail sales and other items. The extra revenues that this move could achieve, some officials hope, would allow shallower cuts in government pension spending, which could make the overall package less politically painful for the Athens.
Under one version of the proposal, pension spending would be lowered by 0.5% of gross domestic product a year, compared with 1% of GDP under a proposed package of policy measures put forward by the IMF, the EU Commission and ECB in early June. That policy package was compiled after a summit of key European leaders in Berlin on June 2, where German Chancellor Angela Merkel and others decided to present Mr. Tsipras with the outlines of their final offer.
The Greek premier was told he could only change measures in that proposed package if he offers alternative measures that achieve the same fiscal effect. Mr. Tsipras has repeatedly denounced measures demanded by the creditors…
A cull of tax exemptions that Greece’s cabinet will consider on Sunday would not only allow for smaller pension cuts, supporters of the idea hope, but would also allow Greece to avoid imposing a hefty increase in value-added tax on electricity—another measure the IMF and EU have proposed but which is politically hard to sell for Syriza.
Let us put not too fine a point on the matter: the fiscal targets that Greece agreed to meet are harsh, and even a 0.5% of GDP cut in pensions would be significant. It isn’t clear that Tsipras will buy into any of the plans presented to him. But Larry Summers points out the downside in a Financial Times op-ed (Summers is intermittently sane in order to burnish his credentials):
Make no mistake about the consequence of a breakdown. With an end to European support and consequent bank closures and credit problems, austerity in Greece will get far worse than it is today and it will probably become a failed state to the great detriment of all its people and their leadership.
The Journal also stresses that a short-term deal would be a bad outcome for Greece:
Speculation is rife that Greece’s creditors at the EU, European Central Bank and IMF would offer a six-month extension of the bailout programme – disbursing more than €10bn in aid to tide the country over the summer – if agreement was reached. Discussions over a third bailout Athens will inevitably also require would be kicked down the road.
Speaking to the Observer, Athens’s chief negotiator, Euclid Tsakalotos, described the prospect of a short-term deal as perhaps the worst possible outcome. Prolongation of the political uncertainty – and scenarios of Greece’s enforced exit from the euro – would, he said, do nothing for the country’s economic recovery.
“What we need is a mid-term solution that will take us through to the end of 2016,” he said. “A short-term solution might be the worst of all. What we don’t want is a postponement of issues like Grexit and financing, so the economy remains depressed and people don’t have a shift in expectations. Optimism is a material force in the economy.”
Unfortunately, it’s hard to see how the two sides can come to anything other than a short-term deal now, given the urgency of patching something up to release funds before the July 20 event horizon. The so-called “third bailout” of restructuring Greek debt (which would entail further extensions of maturities and reductions of interest rates; see this article by Tim Worstall for more details as to why reductions in the face amount of debt remain a bridge too far). The flip side is that Juncker had earlier offered a “fully funded” bailout extension through the the end of March 2016. If that could be achieved, it might provide enough of a negotiating runway to get through the “third bailout” so as to calm rattled nerves in Greece and get deposits back into Greek banks.
So the choice apparently rests with Tsipras. We’ll know in not too many hours what he elects to do. This is a painful choice no matter what decision he makes, since Greece is in a lose/lose situation. Let us hope he reaches the one that is best for Greek citizens.