Greece Still Needs To Clear Several Hurdles, But Even The Best Case Scenario Looks Hopeless

hurdles

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Tuesday night’s vote of confidence in the Greek parliament was crucial, but it was only the first of many hurdles for Greece. Even if Greece manages to clear each and every remaining hurdle, it is still unlikely the government will be returned to solvency.

Medium-term programme not a foregone conclusion
The vote of confidence on Tuesday was made entirely along party lines, underscoring the fact that there is no cross-party consensus for the medium-term programme set to be tabled in parliament on June 28th. It therefore cannot be taken for granted that the Greek parliament will pass the medium-term programme, which lays out plans to generate an additional €28.3bn in government savings.

Even if the medium-term programme is passed on June 28th, the Greek parliament must debate the legislation to implement the plan for at least three days. The earliest the implementation bill will be passed, therefore is July 1st. Eurogroup leaders are meeting on July 3rd to discuss a second bailout for Greece. If the medium-term programme is not passed, the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF)—the so-called troika—have said that there will be no second bailout. The Greek parliament therefore does not have a lot of extra time to spend debating the medium-term programme and getting dissenters on board.

The troika has been seemingly obsessed with the Greek government passing the medium-term plan, but even if the programme does find approval in parliament, there is little chance the government will manage to implement it. Not only are the opposition parties against the programme, but so are many members of the ruling government (Pasok). As recent demonstrations outside Syntagma Square in Athens show, the public is opposed to the new round of austerity measures as well.

A general election in the mix
The troika is scheduled to descend on Athens in September for its quarterly evaluation of Greece’s progress in meeting the targets stipulated in the bailout agreement. If the government cannot demonstrate that it is making swift and significant progress on implementing the terms of the medium-term programme, the troika is going to find it difficult to produce a positive report. Consequently, Greece may have a case of déjà vu as it is told that it must do more before the troika can transfer the next tranche of loans.

Once again criticised for missing its targets and told to accelerate the implementation of harsh austerity measures, the government would face even more opposition—both from within its own ranks as well as from the public. At this point, Mr Papandreou’s government could fall, and a snap election would be called. In only a few months, Greece may therefore find itself once again on the verge of being cut off from official funding, but with a general election to boot.

Second bailout not a silver bullet
Assuming the medium-term programme is passed and a second bailout programme is agreed for Greece, it is still extremely unlikely Greece will be returned to solvency. There are real problems with the reported structure of the second bailout.

According to press reports, the second bailout for Greece will consist of loans from the EU/IMF, privatisation revenues and private sector involvement. It is very risky to assume that the Greek government will raise a certain amount in privatisation revenues given deep-seated opposition within the public sector to privatisation. Furthermore, any efforts to sell land as part of the privatisation drive will be undermined by Greece’s lack of a comprehensive, reliable land registry.

Many details must still be agreed on private sector involvement in the second bailout. It appears there will be a voluntary rollover of Greek government debt, but it will have to be very carefully engineered so as not to trigger a credit event in the eyes of the credit ratings agencies.

The German, French and Dutch governments have already started meeting with major domestic banks to discuss participation in a voluntary Greek debt rollover. It is hard to imagine banks agreeing to volunteer for such a programme.

German banks in particular are demanding incentives for their participation, potentially in the form of government guarantees for the debt rolled over. This sort of incentive is problematic for two reasons. First, credit rating agencies might not view the debt rollover as being purely voluntary if sweeteners are involved to coerce banks to participate. Second, government guarantees for debt rollovers would just shift responsibility for the debt from the banks back on to tax payers, completely defeating the purpose of private sector involvement.

Best case scenario still looks hopeless
Even adopting the rosiest of outlooks, it is hard to imagine Greece avoiding an eventual restructuring of its debt. The harsh austerity measures in the medium-term plan will undermine Greek economic growth, making it even more difficult for the government to start stabilizing its debt levels.

Furthermore, the medium-term programme and the second bailout do nothing to address the fundamental problem that Greece simply has too much debt. Cutting government spending and offering high-interest liquidity cannot possibly solve a solvency issue. These measures can only delay the inevitable, a restructuring of Greek government debt.  For more of Megan Greene’s analysis on Greece and the euro crisis, visit www.economistmeg.com.

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