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Greece: vulture creditors jostling for their next feed
By Dick Nichols
May 5, 2016 — Links International Journal of Socialist Renewal, an earlier and shorter version of this article first appeared in Green Left Weekly — It has taken only nine months for relations between the near-bankrupt Greek state and its creditors — the “Quartet” of the European Commission, European Central Bank (ECB), International Monetary Fund (IMF) and European Stability Mechanism (ESM) — to lurch to the brink of crisis.
These relations are covered by the third bailout memorandum between Greece and the European Commission, which the SYRIZA-led government of prime minister Alexis Tsipras felt forced to swallow last July 12, despite the Greek people rejecting an earlier version by over 60% in the July 5, 2015 referendum. The memorandum commits the ESM to provide the country with €86 billion in exchange for a tightly policed Greek government continuing to implement a package of “reforms” requiring pension cuts, tax increases, privatisations and labour market deregulation.
On April 22, Jeroen Dijsselbloem, Dutch president of the Eurogroup (of Euro area finance ministers), said that an in-principle agreement had been reached among the creditors that would see the Greek government obliged to implement a €3 billion bundle of “contingent” extra cuts if the country started falling behind its debt reduction targets. The “compensation” for Greece was a statement that the Eurogroup was “ready to begin discussions on possible options for granting Greece some debt relief”.
At the same time, persistent differences between the European Union and IMF over what combination of measures would best extract good economic behaviour from Greece were put into suspension, so as to confront the SYRIZA-led government with a united front of creditors.
Since mid-2015 the IMF position, especially among its economists and staff “on the ground”, has been that without debt relief Greece cannot meet its debt reduction targets, requiring primary budget surpluses (before payment of interest) of 1.75% of GDP in 2017 and 3.5% in 2018. Consequently, if the EU cannot agree to restructure Greece's debt burden the IMF cannot be part of the bailout program, since this would put it in breach of its own rules precluding lending to countries with unsustainable debt.
For the IMF, Greece's 2018 primary surplus target should be 1.5% of GDP — the same figure, ironically, proposed by former finance minister Yanis Varoufakis during last year's fruitless negotiations between Greece and the creditors . However, the price of any debt relief and of any agreement that the IMF would enter into must be “significant reform”, especially of Greece's severely underfunded pension system.
According to Varoufakis, writing in the April 3 Der Spiegel, IMF European head Poul Thomsen had already told him in February last year that “at a minimum €54 billion of Greece's debt left over from the first 'bailout' should be written off immediately in exchange for serious reforms”. Writing on the IMF blog iMFdirect on February 11, Thomsen claimed that “the IMF does not want Greece to implement draconian fiscal adjustment in an already severely depressed economy” but insisted that “no amount of debt relief will make Greece's pension system sustainable without pension reforms ... such difficult decisions cannot be 'kicked down the road' through unrealistic assumptions.”
This last phrase was a shot at European Commission economic projections for Greece. The majority Eurogroup stance, driven most by the German ministry of finance and the Bundesbank, has been that there should be no reduction in Greece's public debt burden (now running at €311 billion, 176.9% of GDP), because Greek economy is, on EU projections, returning to growth. Moreover, the hardline suspicion within the Eurogroup, expressed most persistently by German finance minister Wolfgang Schaüble, is that Greece will always use debt relief to dodge action on public sector waste, social welfare dependence and chronic tax evasion.
However, the most powerful motive for the European Commission's happy growth projections — intransigence over debt relief and extra loans as needed (dubbed “pretend-and-extend”) — is never mentioned. In the words of Varoufakis:
On April 22, IMF managing director Christine Lagarde, while reaffirming that the Greek debt burden was unsustainable as presently structured, moved closer to the German position when she stressed the formal IMF position that the load could be made sustainable without any write-offs of the kind mentioned by Thomsen to Varoufakis. Measures like extending loan maturities, capping interest payments, having grace periods on repayment and linking repayment schedules to growth rates could supposedly ease the burden by spreading it out into the future. Lagarde also supported the Eurogroup's “contingent” €3 billion penalty proposal.
Varoufakis himself had proposed last year that Greece's debt burden be made tolerable with this approach, but without adopting the IMF's austerity recipe:
An April 29 article on the Greek web site Macropolis described the present state of play among Greece's creditors: “The IMF, and consequently Germany and some other Eurozone member states, favour the standby measures being clearly delineated and legislated now so there is no way the Greek government can wriggle out of its commitment if the primary surplus targets of 1.75% of GDP in 2017 and 3.5% in 2018 are not achieved. In the Fund's eyes this method would also ensure that the interventions are targeted and on the spending side, rather than allowing Athens to hike taxes again to cover any shortfall.” (emphasis added)
The judgement of the SYRIZA-led government seems to be that it can probably maintain its core support base if it is free to meet memorandum commitments on deficit reduction more through hikes in taxes (hopefully on the rich) and in social security contributions than through cuts, especially to the entitlements of the present generation of pensioners. To date these have had the commitment of Tsipras and social security and labour minister Georgios Katrougalos that their pensions, cut under previous bailouts, are safe.
However, if the IMF-German view prevails that commitments must be met through cuts, the government could well fall, given its thin majority (153 out of 300 seats) and the fact that some individual SYRIZA MPs have already said they will vote against any further cuts. On April 25, finance minister Euclid Tsakalotos said that there was no way the proposal to hang another axe over Greece's neck would get through parliament — especially as the Greek negotiators have already agreed to €5.4 billion in tax hikes and cuts to future pension entitlements.
The Greek counterproposal is that in the event of a primary surplus target being missed an automatic mechanism impose across-the-board cuts on all ministries, but with the finance minister having the discretion to exempt a ministry from cuts on condition that these are applied elsewhere. At the time of writing (May 4), the European Commission and some EU member governments are, according to Macropolis, satisfied with this offer, but the German government and the IMF have yet to state their positions.
The next Eurogroup meeting, set for May 9, should reveal these. As matters stand, Greece is once again staring at a liquidity crunch and €3 billion in repayments to the ECB and IMF by the end of July. Back in February, finance minister Tskalotos said that if the first review (originally due in October) of Greece's compliance with the third memorandum drags on into May and June, the country will be “done for”.
Behind the impasse
Why have major differences between the IMF and the German-driven Eurogroup been brought under control (at least for now)? The heart of the issue is that Greece's creditors cannot afford division as the moment approaches for the country to adopt the most substantive — and painful — measures required by the third memorandum.
Since that agreement was signed last July, the SYRIZA-led government has pushed through three rounds of measures to meet creditor requirements. These have:
At the same time, the government has sought to spread the pain by:
In exchange for applying these measures Greece has so far received €23 billion in “disbursements”, €13 billion to make debt repayments and €10 billion to recapitalise the insolvent Greek banking sector. According to the Jubilee Debt Campaign,if and when Greece gets the full €86 billion plus €6 billion in expected proceeds from privatisations the whole €94 billion will be devoted to debt repayments, bank recapitalisation and increasing Greece's currency reserves.
However, the SYRIZA-led government has been able to register a number of minor gains: it has collected €2 billion in evaded taxes and tax arrears, recapitalised the banks using only one-fifth the funds available, and presided over an economy that in 2015 shrank less than all projections (by 0.3%). In November 2015, industrial production actually increased by 3.3% and the government budget showed a primary surplus of 0.7% of GDP for 2015 as against the memorandum target of a 0.25% deficit. However, this last “gain” was largely due to the massive fall (€10.5 billion) in social security spending in 2015 as compared to 2009.
The three rounds of legislation adopted by the Greek parliament to implement the memorandum requirements have produced waves of protests by farmers, seafarers, metro workers, students, professionals and public sector unionists, as well as a February 4 general strike. SYRIZA has also been falling behind the conservative New Democracy in most opinion polls, with prime minister Tsipras's approval rating now being matched by that of New Democracy's new leader Kyriakos Mitsotakis.
It would be surprising if it were otherwise. In addition to tax hikes and social welfare cuts the Tsipras government has had to sell off ports and airports at knock-down prices and been forced by the European Union to convert Greece into a holding pen for tens of thousands of refugees from Syria, Iraq, Afghanistan and other war-affected countries. The latest Kapa poll, carried out in mid-April for the admittedly anti-SYRIZA daily To Vima, 45.2% of those interviewed saw the influx of refugees into Greece as a threat, as opposed to 30.6% who saw it as an opportunity (24.2% undecided).
And all that is before the “unsolvable equation” of the underfunding of the Greek pension system has been seriously tackled. Its shortfall in 2015 required €17.9 billion (10% of a Greek GDP that has shrunken by 25% since 2008) to come from the state budget, so as to top up the country's contributory pension funds, whose income has collapsed with falling wages and rising unemployment.
At the same time, and even while calling for debt relief, the Greek government continues to act as if a 3.5% primary surplus by 2018 is a feasible goal. In an April 14 article in the Financial Times, Tsipras wrote that his government had “reached agreement with all the European and international institutions monitoring the bailout on the size of the fiscal package that needs to be phased-in over the next two years in order to meet the primary balance target of 2018.” However, Tsipras expressed concern at IMF insistence on “changing the design of the reforms in a way that leaves their yield and simplicity intact, but makes the reform significantly less progressive, shifting a considerable share of the burden on to the relatively poor” (emphasis added).
Earlier, at a March 6 meeting of the SYRIZA central committee, Tsipras had outlined his view of where the SYRIZA-led government was situated in its fight to achieve debt relief in the context of EU-IMF differences:
In February, Emile Roemer, visiting leader of the Dutch Socialist Party, wrote after meeting with Tsipras that:
Clearly, the SYRIZA-led government is doing all it can to bring the first memorandum review to a close, not only so as to receive its next desperately needed disbursement and see Greek banks gain access to ECB funding, but also to create the feeling that six years of economic recession and social pain are finally coming to an end.
SYRIZA must be destroyed
Tsipras's Financial Times article came ten days after Wikileaks had released a transcript of a March 18 private conversation between IMF European head Thomsen and Delia Velkouleskou, IMF mission head in Greece. Their discussion focussed on two problems: how to make the Europeans see that the debt reduction targets in the memorandum were impossible given the IMF's projections of the Greek economy's likely growth path, and how to get the Greeks to accept serious reforms in exchange for debt relief. Thomsen said: “I am not going to accept a package of small measures. I am not.”
Velkouleskou and Thomsen speculated that the only way to get both the Eurogroup and the Greeks to see sense was to have Greece face a “credit event” or wait until such an event — default on a debt repayment instalment — was about to take place.
The leaked transcript caused fury in Greece, with Tsipras writing to IMF head Lagarde and asking “whether Greece can trust, and continue negotiating in good faith with, IMF officials who ... seem to be threatening to delay the process in the belief that only a credit event will work to extract concessions.”
Lagarde replied by insinuating that the Greeks had tapped the conversation between Thomsen and Velkouleskou (“it is critical that your authorities ensure an environment that respects the privacy of their internal conversations”) while stating that “we are still a good distance away from having a coherent program that I can present to the Executive Board.” Vengeful IMF acceptance of the memorandum's primary surplus targets (based on the European Commission's “unrealistic assumptions”!) and of the Eurogroup's “contingent” cuts bundle then followed.
An April 29 open letter by eight members of the European parliament from its social-democratic, green and left caucuses summarises the present plight of the SYRIZA-led government: “While implementing more than 100 measures validated by the Eurogroup since September, and fully respecting the terms of the last agreement concluded in July, Alexis Tsipras is dealing with the risk of a negative ultimatum, as desired by some creditors such as the IMF and Wolfgang Schaüble ... The creditors [have] had two goals since July 2015: imposing the austerity measures of the memorandum and getting Tsipras out. They achieved the first one and they are obviously still pursuing the second one.”
The strategy is to increase the pain that the SYRIZA-led government has to inflict on its support base as the price of getting each new tranche of desperately needed funding: in this way, the government will hopefully become so unpopular that the conservative New Democracy can defeat it at the next election, which could be brought on early by the refusal of some SYRIZA MPs to support the next wave of austerity measures.
At the same time the idea of a radical left alternative can be discredited across Europe, especially with a view to undermining the position of anti-austerity forces in the repeat Spanish election due for June 26. If Germany and the IMF reject Tsakalotos' alternative to the creditors' “contingent” cuts package — the commitment to meet deficit targets in case of shortfall but with flexibility for the Greek government to decide how — it will be clear confirmation of their intention to remove SYRIZA from government as soon as politically practicable.
At the mid-April meetings of the World Bank and IMF (before the IMF and Eurogroup reached their joint negotiating position), German finance minister Schaüble was still insisting that Greece receive no debt relief, describing it as “an attempt not to do what irrefutably must be done”. At the time Tsakalotos commented: “Schäuble is committed to three things that aren’t possible at one and the same time: we must have a deal; the IMF must be on board; we don’t need to give anything on debt. Those three things are mutually inconsistent. One of those three is going to break. Either we won’t have a deal, or the IMF won’t be on board, or we’ll have something on debt.”
Since the April 21 Eurogroup meeting produced its intensification of the creditor hard line towards Greece, mainstream economic commentators have been scratching their heads as to why the creditors remain committed to policies that are bound to keep the country in recession. For example, former head of mega-fund Pimco and chairman of Obama's Global Development Council Mahomed El-Elian wrote on April 22:
Paul De Grauwe and Lorenzo Codigno, of the European Institute of the London School of Economics, warned on March 26 that the dangers of Grexit “appear significantly underestimated these days”, and would, if it eventuated, “represent a permanent blow to financial and economic integration” and a permanent destabilising factor in the Eurozone.
Writing in the conservative US financial publication Forbes on April 22, journalist Frances Coppola could only find an adequate comparison for creditor treatment of Greece in the pillaging of Germany by the victor nations after World War I. Quoting Keynes's classic The Economic Consequences of the Peace, she said:
While in no way denying the vampire-like behaviour of Greece's creditors, Coppola's comment overlooks the important point that the Quartet's central goal is to rid itself of the unreliable SYRIZA administration and replace it with a compliant New Democracy government or broader alliance. Certainly, the conservative ruling People's Party in Spain would be very pleased to see the SYRIZA-led administration fall before the June 26 Spanish poll, as would the whole European establishment.
Dissent in SYRIZA
On April 27, Tsipras asked Donald Tusk, the president of the European Council of EU heads of state, to convene a European Council meeting to discuss the Eurogroup proposal for a €3 billion contingency cut plan for Greece. Tusk refused, saying “I am convinced that there is still work to be done by the ministers of finance who have to avoid a situation of renewed uncertainty for Greece.” (This spat set off alarm bells in Greek debt and stock markets: 10-year bonds jumped 50 basis points to 9.14% while the Athens stock market index fell 4.3%.)
The SYRIZA-led administration now finds itself in its tightest corner to date. It won the September 20 elections with the message that the memorandum agreement, though very bad, was the best that could be achieved. Moreover, it argued plausibly that SYRIZA alone could be trusted to implement a program to defend Greece's most vulnerable people against the impact of the memorandum and to continue the fight against Greece's corrupt political and media establishment.
How much has been achieved? According to Stavros Panagiotidis, chief advisor on social policies in the Greek prime minister's office, writing on the Transform! web site on March 7, the government's parallel program has seen 2.5 million Greeks without medical insurance gain access to the public health care system, the recruitment of 3500 extra medical staff, provision of free electricity and water to the poorest households as well as free public transport to the unemployed and hot school meals to 200,000 students. Other plans involve teacher and university lecturer recruitment and boosted funding to scientific research in order to arrest Greece's alarming brain drain.
On February 24, the Greek parliament also adopted a new law covering public service recruitment, with a view to ending the Greek state's “partitocratic” culture, which has seen public service jobs doled out in exchange for political support and the state bureaucracy operate as a training ground for party apparatchiks. At the same time, television has become subject to licensing and the country's cabal of media barons will now have to meet specific criteria — and pay the state — to win TV licenses.
In his address to the March SYRIZA central committee meeting Tsipras listed other measures undertaken by the government, including youth jobs and training programs to be centred in the areas with highest youth unemployment. A number of these programs are joint ventures with social support movements like Solidarity4All and financed by crowdfunding.
Nonetheless, only six months after its September election win and despite its best efforts, SYRIZA's message looks to be wearing thin. In a context of ongoing social revolt voices expressing concern at growing popular alienation with the government are more and more heard within the radical coalition.
On April 15, according to the Macropolis web site, the “movement of 53”, the most left-leaning of the groupings within SYRIZA and with 11 MPs including Tsakalotos, issued a statement which said that, while SYRIZA had been able to argue convincingly enough at the September poll that it had been forced into signing the third bailout, the memorandum was now increasingly seen as the left coalition’s own program rather than one imposed by Greece’s creditors. The group also criticised slow progress in implementing the parallel program and stressed that much more was needed to maintain the belief of SYRIZA's supporters.
Most tellingly, it said that it disagreed with the opinion of the Tsipras leadership that SYRIZA should try to stay in government at all costs, stating that the government should “fall heroically resisting the internal or external troika rather than humiliatingly at the hands of [Greek] society itself.”
The present mood
The latest Kapa poll provides a snapshot of the present contradictory mood in Greece, even while it should always be kept in mind that To Vima is one of the SYRIZA government's most hostile media enemies.
According to the poll, 70.6% of those interviewed have a negative or very negative view of the way the government is conducting negotiations with Greece's creditors, 79.7% disapprove of its overall work and 55% are opposed to further austerity measures (and would vote them down if a referendum were held).
Nonetheless, no clear majority exists for an alternative policy to the one being followed by the Tsipras administration. For example, 38.5% would support breaking off negotiations with the Troika, 29% think they should be concluded however possible, and 27% think they should be dragged out to get the best possible result. 56.2% think the IMF should be excluded from any new arrangement, while only 28.6% want it included.
Only 34.3% want any final agreement put to a referendum, while 46.3% want it voted on by parliament. A narrow majority (46.3% to 38.4%) want the parliamentary opposition to support any such deal.
Support for staying in the Eurozone is at 60% despite the last six years of brutal austerity, but with 44.5% considering that Greece should consider leaving the euro over the next five years.
Seventy per cent of those interviewed think a government better than the present one is possible, but a majority oppose early elections (by 48% to 40%).
New Democracy now leads SYRIZA in most opinion polls, Tsipras is no longer unambiguously preferred as prime minister and the number of undecided voters has jumped, even while there has been no noticeable swing to any of the smaller parties (left, centre or right).
This, however, may change: Popular Unity, the party arising from SYRIZA members opposed to the third memorandum and prepared to countenance Grexit is about to have its founding congress while former parliamentary speaker Zoe Constantopoulos is set to launch her new party Sailing For Freedom.
In February, Tsipras told Roemer that “if we don't succeed within a few months in showing that there's light at the end of the tunnel, it will all have been for nothing. Then the middle class and the farmers will rebel and our country will fall prey to chaos.”
Given the weapons that are in the hands of its enemies, it is hard not to be cautious about the chances of the besieged SYRIZA-led government surviving the challenges it faces. On the economic front, the very fragile recovery is vulnerable to a repeat of last June's liquidity crisis and IMF loan default. Such an event would make private capital even less prepared to invest in Greece while SYRIZA continues in government, and this when total investment in 2015 was only 30% of what it was in 2007.
The banking system remains very sensitive to shocks, especially as 43.5% of all loans are classed as non-performing (exceeded only by Cyrus at 50%), and banks remain reluctant to lend, even to creditworthy customers. In addition, the Bank of Greece estimates that the refugee crisis has shaved off 0.3%-0.4% off GDP in direct costs, with indirect costs still to be calculated.
Nor has all the social pain produced much gain in the way of increased export competitiveness (relatively lower prices of exports). In a November 2013 post on the Macropolis site, economist Yiannis Mouzakis pointed out that a 23% fall in labour costs between late 2009 and 2013 had been accompanied by hardly any fall in prices — firms had pocketed the increased margin instead of passing on the saving in wage costs as lower prices.
The impact shows up in the paltry increase in Greek exports produced by the brutal “internal devaluation” and crushing of domestic demand the economy has suffered — only 11.2% higher in 2015 compared to 2009. Other economies on which this medicine was inflicted, for example Portugal, have at least seen export income increase by 30%.
As for the scale of debt relief that is being entertained by the country's creditors, the Jubilee Debt Campaign summarised its value as follows:
In addition, Greece, like Argentina, faces the possibility that so-called “vulture fund” holders of its debt will prosecute lawsuits requiring that they be paid at full face value (and not at the “haircut” value agreed under the second memorandum).
Even the most optimistic scenario — that Greece will experience a “recovery” like Spain, Ireland and Portugal — will see much of the benefit go to those in society who least need it — the finance sector and other big capital and the very wealthy.
What factors, then, would possibly prevent the German-IMF position from prevailing in the negotiations? As always, the creditors must calculate what the political price of that hard line might be. It might:
All of that adds to Greece's narrow room to manoeuvre against its creditors. Given that, will the SYRIZA-led government resist or succumb to their aggression?
Dick Nichols is Green Left Weekly's European correspondent, based in Barcelona.
 Retranslated from the Italian translation at https://diellemagazine.com/2016/03/07/tsipras-il-nostro-popolo-con-i-profughi-contro-le-guerre-e-lausterita-neoliberista/