Wednesday, February 8, 2012

Will Austerity Lead to Another Greek Crisis?

Ekathimerini reports that the leaders of Greece’s three coalition parties received on Wednesday morning the text of the outline agreement for a new bailout and are due to meet in the afternoon in an effort to reach consensus on the measures the government will have to adopt.

The drafts, which contain 32 pages setting out the reforms and fiscal targets the leaders will have to agree to, were delivered to the headquarters of PASOK, New Democracy and Popular Orthodox Rally (LAOS) at about 9 a.m. The document also contains some extra pages explaining some of the measures proposed.

A meeting between PASOK’s George Papandreou, ND’s Antonis Samaras and LAOS chief Giorgos Karatzaferis with Prime Minister Lucas Papademos has been scheduled for 3 p.m. but this could change.

Papademos was involved in talks late on Tuesday with the representatives of the European Commission, the European Central Bank and the International Monetary Fund -- known as the troika -- on the steps it would take to save 3.3 billion euros.

One of the stumbling blocks that emerged on Tuesday was the troika’s new demands for cuts to basic pensions, which start at 360 euros per month, as well as supplementary ones.

New Democracy had wanted auxiliary pensions to drop no lower than 300 euros but it is believed that the troika proposed that if this level is to be maintained then basic pensions should be cut. The reductions on basic pensions may apply just to those above a certain level.

In an interview with Dow Jones Newswires on Tuesday, Samaras indicated he was unwilling to accept more cuts to pensions. My enemy is recession,» he said. «Pensions have already been cut. Slashing them further will lead to even deeper recession."

It is also though that the draft agreement proposes a 22 percent reduction to the minimum wage of 751 euros per month, which may be passed on to private sector employees who earn more than this amount.

If the party leaders agree on Wednesday, then the troika officials are likely to hold talks with each of them individually to obtain their explicit commitment to the measures. It was not clear if this would involve written guarantees.

The new loan agreement would be submitted to Parliament on Friday and voted on two days later.

The Eurogroup of eurozone finance ministers is due to meet on Thursday to assess any potential agreement in Greece.

Of course, the reduction in minimum wage means an automatic drop in pensions:

What the party leaders are about to sign up to – again, if reports are correct – is the substantial reduction of the minimum wage and the abolition of the principle of metenergeia, or nachwirkung as its known in German law. In other words, if employers and unions manage to agree on new collective contracts, the baseline will be 20 percent lower than before, thereby affecting all the wage brackets above it. If the two sides don’t agree on new deals, employers will be free to negotiate individual deals with their employees. The basis for these agreements? The new, 20-percent-reduced, minimum wage.

While some of the political leaders will proclaim their role as saviors of Greeks’ hard-earned crusts by protecting the 13th and 14th salaries, it seems that all they have managed to achieve is swap a 15 percent reduction, which would have occurred if those monthly wages were lost, with a 20 percent one that will come with the slashing of the minimum wage and the terms under which collective contracts apply. Rather than two monthly salaries, Greek private sector workers are set to lose three.

The fact that some people are portraying this as a victory for their negotiating technique means that either they are woefully misinformed or, as is more likely, they are being intentionally duplicitous.

Others are more hopeful but cautious. "There is a path here for Greece, there is a way out for Greece, if it wants to take it, but there’s no denying this will be tough,” Grant Lewis, an economist at Daiwa Capital Europe Ltd. in London, said in a radio interview with Bloomberg’s Ken Prewitt yesterday. “You are talking about multi-year austerity packages against a backdrop of an economy that’s shrinking very rapidly.”

How tough will it be? Just look at the dramatic drop in budget revenues:

Budget revenues were found to be lagging by a considerable 1 billion euros in the year’s first month, provisional January data compiled by the Finance Ministry showed on Tuesday.

Revenues posted a 7 percent decline compared with January 2011, while the target that had been set in the budget provided for an 8.9 percent annual increase.

Worse still, value-added tax receipts posted an 18.7 percent decrease last month from January 2011 as the economy continues to tread the path of recession: VAT receipts only amounted to 1.85 billion euros in January compared to 2.29 billion in the same month last year.

The VAT revenue data represent a particular worrying sign regarding the depth of recession for 2012, while even more painful measures are expected to lead to a reduction in salaries and therefore a further drop in consumption. This is the vicious cycle that the government will have to tackle by way of additional fiscal measures this summer.

According to the current data, the 2012 budget will certainly have to be revised soon, given that the original estimate for a contraction of 2.8 percent is now raised to 3.5-4 percent of gross domestic product.

Finance Ministry officials attribute the slump in VAT receipt figures to the major cash flow problems that enterprises are facing. Some of the latter are choosing not to pay for their VAT in order to plug other holes caused by liquidity problems.

At the same time the crisis is seriously hurting the competitiveness of Greece’s economy, resulting in a considerable drop in entrepreneurship. Finance Ministry data showed that some 111,000 companies shut down in 2011, against just 75,000 new businesses being set up. In fact the majority of new start-ups are not actual enterprises but newly self-employed professionals.

This is attributed to the dramatic fall in market turnover and the insecurity that entrepreneurs feel, dissuading them from getting engaged in the local business field.

The consequence of that is the reduction of state revenues from corporate tax.

Must admit my first thought after reading about the dramatic drop in budget revenues was they are lying to make their case for less austerity. But it is possible that they're telling the truth and that austerity has reached the point where tax revenues are declining dramatically.

In any case, a new poll shows that the the Democratic Left has attracted the support of a large segment of austerity-weary Greeks:

Dissent-ridden socialist PASOK is on a downward spiral and conservative New Democracy is maintaining its popularity while the Democratic Left has attracted the support of a large segment of austerity-weary Greeks, according to the results of a new opinion poll that also show that nine in 10 Greeks are unhappy with Prime Minister Lucas Papademos’s coalition government.

The new poll, carried out by Public Issue for Skai, showed ND to have inched forward to 31 percent, consolidating its growing popularity, while PASOK continues to languish in fifth place with 8 percent.

The poll, carried out on a sample of 1,002 people last week, showed the Communist Party (KKE) and the Coalition of the Radical Left (SYRIZA) to be holding firm at 12.5 and 12 percent respectively. But the Democratic Left has surged in popularity, garnering 18 percent of the public vote (up 4.5 percent since last month).

All together, the leftist parties garner an impressive 42.5 percent, but as KKE has ruled out cooperating with other parties, the figure is misleading.

Support for the right-wing Popular Orthodox Rally (LAOS), the third party in the tripartite coalition, slipped to 5 percent -- from 8 percent during its heyday in 2010 -- while the extreme-right Chrysi Avgi (Golden Dawn) has surged to 3 percent, hitting the threshold for entering Parliament.

The poll’s results for parties are broadly reflected in the support for the politicians that lead them. Democratic Left leader Fotis Kouvelis tops the list, attracting the support of 56 percent of respondents, followed by 41 percent for SYRIZA’s Alexis Tsipras and ND chief Antonis Samaras with 31 percent.

Respondents were divided on Papademos, with 48 percent expressing a negative opinion and 46 percent a positive one. Respondents were virtually unanimous though in their criticism of his government’s achievements, with 91 percent expressing disappointment.

What this tells me is that even if Samaras wins the next elections, he'll be heading a minority government and will face stiff opposition from leftist parties. That's one of the reasons why they're trying to finalize the agreement with troika as soon as possible.

What remains to be seen is whether all these austerity measures will succeed or throw the country deeper in recession and ultimately, into a much more severe crisis.

Below, Grant Lewis, an economist at Daiwa Capital Europe Ltd., talks about the European sovereign-debt crisis, the outlook for private-sector involvement in Portuguese debt and the risk of contagion. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse."

Also, Yanis Varoufakis, professor at the University of Athens, told CNBC, "this bailout is certainly not the right answer for anyone, for Greece, for the euro zone, for the world. Here we have a typical bankruptcy problem, the first time around we decided to treat it like an illiquidity problem, it wasn't." Varoufakis thinks Greece should default "instantly, immediately" and remain in the eurozone.

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