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Third time unlucky

The European Community has drawn its most draconian line yet with Greece. But the third bailout will also fail.

Written by Omkar Goswami |
Updated: July 16, 2015 12:07:45 am
Greece, Greece banks, Greece banks closure, India, Indian economy, Indian central bank, India Finance secretary, Finance Secretary Rajiv Mehrishi, Greece protests, Greece economy, Greece ATM limits, Greece limits withdrawals, Greece ATM withdrawals, Greece banks shut, European central bank, Greece loans, economy Greece, economy news, indian express news In truth, Greece should never have been admitted to the eurozone in January 2001.

Three factors — Greek Prime Minister Alexis Tsipras’s brinkmanship at Brussels, 61.8 per cent of Greeks voting “Oxi” (nay) at the July 5 referendum and the European Community’s (EC’s) concerns of being seen to be harsh with a country under stress — have come together to fashion yet another bailout package for Greece. Like the previous packages, this too won’t work. But before explaining why, let me outline a factual summary of what has happened till now.

In truth, Greece should never have been admitted to the eurozone in January 2001. Everyone who mattered in the EC and in Greece knew that the country had massively fudged its fiscal deficit and public debt data to meet the conditions set out in the Stability and Growth Pact (SGP) that it had to fulfil to be in the eurozone. But politics trumped economics. With the Athens Olympics in 2004, the EC wanted to show the world that the euro could work just as well in a far-flung land as it could in the core. So Greece qualified.

Having become the 12th eurozone nation, Greece was inundated with huge inflows of the euro. The country grew. Between 2001 and 2007, barring a single year, Greece’s GDP increased at rates much higher than the eurozone average. Flooded with funds in infrastructure, real estate and tourism, the Greeks were breaking plates and dancing the sirtaki like the party would never end.

There were four problems. Most of the growth was financed by foreign debt. But who cared? The euro was convertible and Greece was growing fast. Second, these huge fund flows gave successive Greek governments the excuse to raise subsidies, pay higher salaries and pensions and create greater public-sector employment. By 2009, the government’s final consumption expenditure was almost 23 per cent of GDP, which was totally out of whack for an economy of its size.

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Third, in not a single year since joining the eurozone did Greece meet the fiscal deficit and public debt conditions of the SGP. Not even one year. Not by a long shot. After the global financial meltdown in 2007-08, neither did France, Italy or Spain. But these were “too big to fail”. Greece, with less than 2 per cent of the EU’s GDP, was not.

Fourth, like most Indians, Greeks are chronic tax dodgers. For years, the government concocted its tax-collection data. Yet, even according to the fabricated data, direct tax collection was 9.4 per cent of GDP versus 12.5 per cent in the eurozone. In fact, actual tax realisation is much worse. For instance, the government collected less than half of its tax dues in 2012.

These four failings — escalating international debt, an untenable public sector, huge fiscal deficits and public debt, and poor tax revenues — came to a head in 2010. By then growth had disappeared; the fiscal deficit exceeded 11 per cent of the GDP and public debt was at 146 per cent. Greece went for the first bailout.


In May 2010, the EC, the European Central Bank (ECB) and the IMF advanced a loan of 110 billion euros to prevent sovereign debt defaults and cover Greece’s needs from May 2010 till June 2013. The package required implementing austerity measures, structural reforms and privatisation. These weren’t effected in any meaningful way. Then came the second bailout in 2012 of 130 billion euros, where banks were recapitalised and private creditors holding Greek government bonds were forced to take a haircut of almost 54 per cent. Even that failed. Now there’s the third bailout of 82-86 billion euros, spread over three years.

This “bailout” imposes a set of conditions that Greece has never been able to meet. Between July 15 and 22, the country must seek legislative approval along with timetables to: One, streamline its VAT system and broaden the tax base to increase revenues. The 30 per cent VAT discount for its islands must go and more items will need to be covered by the highest VAT rate of 23 per cent. Two, announce measures, with dates, to streamline its pension system and penalise people for taking early retirement to enjoy a longer state-financed pension-funded life. Three, safeguard the legal independence of ELSTAT, Greece’s statistical bureau. Four, implement all relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the SGP’s new incarnation) and agree to a particularly tough condition: If Greece cannot meet its primary surplus target in any year, it must automatically reduce public expenditure even more to do so. And five, adopt a code of civil procedure that significantly accelerates the judicial process and allows for faster bankruptcy.

In addition, Greece must adopt more ambitious product-market reforms, with clear proposals and timelines; privatise the country’s electricity transmission network; modernise labour laws and practices to align these with the best international norms; strengthen the financial sector, including by taking decisive action on non-performing loans, and eliminate political interference in bank appointments; develop a significantly scaled-up privatisation programme, under which “valuable” Greek public-sector assets such as airlines, airports, infrastructure facilities and some state-owned banks, currently valued up to 50 billion euros, will be first transferred to a new independent fund based in Athens and then monetised through ‘“privatisations and other means”; and modernise and strengthen Greek governance, by putting in place an EC-overseen programme for capacity-building and depoliticising the administration.


The EC has also stated that there will be no more haircuts on Greek debt. I see all this as really tough talk — the most draconian line that the EC has ever drawn with Greece. It considers the “above commitments as minimum… to start negotiations with the Greek authorities”.

I predict that the Greeks will not be able to meet these conditions. It is not in their psyche, and Tsipras’s grandstanding has made it worse. At home, those who voted “Oxi” and his party members will haul him over the coals for raising nationalist expectations and then selling out. That has begun. In Brussels, it is no longer the Krauts versus Hellas. Most EU members are fed up with Tsipras’s constantly shifting positions, and want no more of it. Either he agrees to bitter medicine or Greece can exit. This time, the EU is well prepared for the economics, even the politics.

We can safely bet that the third bailout, if it is that, will also fail. The problem is that there’s nobody on the other side to accept the wager and offer the odds.

The writer is the founder and chairperson of CERG Advisory Private Limited.

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First published on: 16-07-2015 at 12:00:00 am
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