May 09, 2016
High noon over debt relief
All eyes are on the eurogroup meeting today, after the Greek parliament adopted the pension and tax bill and sent its proposal for a automatic fiscal cut mechanism to the eurogroup members. We still don’t see a deal happening today for the review to conclude, nor any agreement on debt relief. But the finance ministers might agree on a procedure about how talks could move forward.
In a letter to all euro finance ministers, Christine Lagarde insisted that the eurogroup needs to move on debt relief and fiscal targets as the numbers still don’t add up: current measures only produce a 1.5% primary surplus in 2018 at best, and the 3.5% target is not only unrealistic but also undesirable, which means debt relief is unavoidable. The letter, posted by the WSJ blog, is worth reading in full. Without change in the target or debt relief the IMF is out of the picture. The letter also made clear its frustration with the Greek government and the short-term measures that are, in the end, counter-productive:
“Based on past performance, those ad hoc measures are not very credible, but they are also undesirable as they add to uncertainty and fail to resolve the underlying imbalances.”
The letter also makes the point that Greece legislated a dozen contingency-type measures in the past, and they all did not work. What the Greek government came up with is another bundle of ad-hoc measures, not what the IMF would call structural reform. Also, whenever the fiscal stance improved in the past, new spending demands arose and the pressure for fundamental change was lost. KT Greece makes the point that in the seventh year of economic crisis, with pensions one of the main sources of income for whole families, it is virtually impossible to reverse the grave mistakes and missed chances of the past.
In Athens, meanwhile, the Greek parliament adopted two bills on pension and tax reform yesterday after a two day debate in parliament. The bills got the backing from all of its 153 MPs, while all opposition parties voted against. The passage was helped by some last-minute amendments, such as tax-free thresholds distinguishing four types of family status. There are also exceptions here, including for the armed forces. This is a boost for Alexis Tsipras, showing that his powers of persuasion have not waned and that the coalition is cohesive enough, comments Macropolis. The measures represent two third of the bailout package, coming up to 2% of GDP. There is another 1% to be legislated, mostly increases to indirect taxes, but this should be comparatively easy. Outside parliament there were protests everywhere. Professional unions threaten to expel those MPs who voted in favour of the measures, including PM Tsipras as well.