With the ending of the daily GreekWatch feature last Monday, following the “staff-level” agreement between the juniors working for Greece’s bailout creditors and the Greek government, a weekly update was promised between now and 15th July when Greece is due to start paying maturing debt. If Greece doesn’t have its next tranche from the IMF/EU by then, there will be the messiest of defaults and that is probably the backstop deadline for Greece to resolve its present difficulties. There will be a weekly roundup over the next four weeks.
In overview, there has been a deterioration in the past week in the prospects for a clean resolution of the Greek crisis. That is evidenced by the interest rate demanded by the market on 10-year Greek bonds rising from 15.94% after the staff-level agreement last weekend to close at 16.72% yesterday. There has been a consequent deterioration in other PIGS bonds. What has happened?
InGreece itself, the plan agreed at staff-level has had a difficult reception. The cabinet has approved it which represents one hurdle overcome, but now it needs to be agreed by the ruling PASOK party (160 seats out of 300 in parliament) and by the parliament itself (the IMF/EU are demanding cross-party “consensus”). The plan itself will now be published before parliament on Monday next but details have been seeping out and if confirmed, it is indeed scary what the new austerity measures required in Greece will include
(1) The country’s 1m public servants will be cut by 15% (remember that’s in a country with a population of 11.3m). Think about what that means compared to Ireland with 350,000 public servants and a population of 4.5m; if you exclude the Greek military (over 100,000), Greece has roughly the same number of public servants per head of population as Ireland now, and the aim is to reduce headcount so that Greece will end up with about 6.7 public servants per 100 population compared with Ireland at 7.1 (that’s after Greece’s plans to cut 15% and Ireland’s to cut 30,000). There will be some voluntary cutting, with the plan to replace natural wastage on a 10:1 basis but there is also likely to be compulsory redundancy.
(2) The working week for public servants is to be increased from 37.5 hours to 40 hours.
(3) On top of reductions in public servant pay of 20% in the past year, there are further cuts forthcoming, though their impact is not precisely known at present. Payscales will be changed to bring parity between the public and private sectors and performance bonuses will be introduced.
(4) A new levy of 2-4% on income, including income in 2010. That’s significant, income that was earned and taxed in 2010 will be subject to additional taxes.
(5) The tax free allowance base to be reduced from €10,000 to €6,000
(6) The property tax threshold (the valuation level below which no tax is paid) reduced from €400,000 to €200,000. Greek’s currently pay about 0.5% of a property’s value each year but only on properties worth more than €400,000
(7) A new tax on swimming pools and yachts (in Germany in particular, there is an image of some Greeks living life on the hog and not paying taxes, so optically these measures may satisfy some creditors. InIrelandit might be helicopters and bouncy castle hires)
(8) Car tax to be increased on larger and more expensive cars
So what has been the Greek reaction? Local strikes, continuing demonstrations inAthensbefore the parliament building and in other cities and an Opposition which has seemingly set itself at odds with the plan. What’s the domestic outlook? More unrest, a general strike next Wednesday, continuing demonstrations, political manoeuvring and point-scoring but at the end of the day, or rather end of the month, the betting is that the plan will be approved byGreece’s parliament. That’s not a certain bet by any means, but it seems to be accepted that Greece must at a minimum balance its primary deficit (what it spends on public servants and social welfare against what it collects in taxes). To say that securing agreement to the plan in Greece will be a challenge would be an understatement.
To an extent though, Greece’s domestic circumstances are less important that the clash of the titans happening outside the country. And it will be in buildings inBrussels, Frankfurt, Berlin and Washington that Greece’s short-term fate will be determined. What’s the likely Greek solution?
(1) A second bailout worth €120bn, on top of the existing €110bn bailout. The €120bn will be funded from a mixture Greece’s own resources (€30bn of additional privatisation, bondholders agreeing to roll-over €30bn of debt and the EU and perhaps the IMF contributing the remaining €60bn)
(2) The second bailout imposing a roll-over of debt on bondholders. This is unlikely to be what the ECB wants – “purely voluntary and without any element of compulsion” – and is likely to trigger a declaration by the ratings agencies, Fitch, Standard and Poor’s and Moody’s that there has been a default.
What does all of this mean forIreland?
Our approval will be required for a second bailout. That might be a good time to point out that Ireland is not Greece, yet we are being penalised with higher interest rates and parochial demands on corporation tax. Now might be a good time for the EU to recognise our efforts and waive the €7bn profit that the EU had intended making on our loans, and instead provide the loans at cost.
If Greece is defaulting on its loans, as determined by both the ECB and the ratings agencies, then why shouldIrelandhonour bondholders in insolvent banks? If the ECB is to apply parity to its treatment of countries defaulting, then at a minimum there should be an acceptance of bondholder burden-sharing, and not to threaten to withdraw non-standard liquidity measures.
Minister Noonan has so far refrained from shovelling another €24bn into Irish banks, which would mark a point of no return, and it is indeed fortunate at this stage that our creditors have agreed that the recapitalisation can be deferred to the end of July. At that stage, we should be clear on Greece’s position.
For the week ahead, expect a continuing cacophony of opinions, initiatives and rumours outside Greece as the Germans battle the rest of Europe to impose some burden-sharing by bondholders inGreece. Within Greece, expect a lot of anger. And here, hopefully expect officials to be carefully considering various scenarios and courses of action for our country, which is far from out of the woods. The IMF/EU staff level report on Greece should be published and we should have full details of the austerity and privatisation plan.
NAMA Wine Lake 
As usual, so clear and concise that even an economic illiterate like myself can understand it.
OK, its not the Greek negotiations, but if you are curious how the Irish ones ended, and then other conditions were sort-of-imposed , have a look 32 minutes in to Patrick H’s interview here:
http://www.tv3.ie/shows.php?request=tonightwithvincentbrowne&tv3_preview=&video=36746
Betting on the PIGS.
http://streetlightblog.blogspot.com/2011/06/betting-on-pigs.html
The picture of ECB kicking a can down the road is not appropriate, imagine a full Euro Pallet full of cans…. try kicking that down the road ;-)
The political forces at play in Europe however succeed to convince the mainstream that a blindfolded one legged man will easily take on this task.
In terms of ‘defaulting’ on senior bank bonds, surely a similar mandatory rollover would be the sensible thing to do? This would reduce the funding squeeze on the banks. It could probably be eased past the ELG, in that there is no question of not repaying, just not on demand.
Consider it making all the MTNs callable at the government’s will rather than the bondholders.
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Good stuff, I was almost starting to miss ‘the Daily Bail’….
Times reports that the Greek PM is bring the austerity plans to Parliament today?
Eeek?
@Rob, the plan as of the end of last week was to present the plan to parliament at the start of the week, and as we’re at Wednesday, perhaps that has slipped but perhaps the PM wanted the plan to be debated after the mass protests taking place right now. The plan as of late last week was to approve the plan by the end of June 2011, which therefore anticipated three weeks of debate, possibly a degree of renegotiation but by the end of June, there would have been parliamentary agreement at national level in Greece to the way ahead. So I wouldn’t immediately be spooked by what you say.
That said, this is plainly a very fast moving story. The backstop is 15th July and there isn’t enough time here to cover the daily twists and turns – which boil down to (1) will Greece domestically accept the plan (2) will the ECB allow the extension of maturing debt (3) will the troika agree a second bailout (4) will the troika agree the drawdown of the next tranche. Greek bonds have sky-rocketed this morning indicating an expectation of some degree of default (possibly soft default but the possibility of a messy hard default remains).
We can but hope that folks at the NTMA, CBI and DoF are examining the various scenarios and their impact here, because after Greece we are likely to be most affected.
Ah, no unlikely to be voted on today then, I jumped the gun a bit.
When I read in the media about the whole “not voting on the plan until after the Ecofin meetings” there seemed to be no source for the info in the various newspapers other than “a Greek source” so I hadn’t taken it seriously.