Appoint outsiders to run Greece is the only solution.
Greece in turmoil: Run into the ground
By Kerin Hope and Peter Spiegel
Published: June 17 2011 22:00 | Last updated: June 17 2011 22:00
Stelios, a 28-year-old electrician, has been spending several evenings a week at a tent camp outside the Greek parliament run by Indignant Citizens, a new protest movement. He joins hundreds of others attending a self-styled “popular assembly” – a nightly open-microphone event at which Greeks vent their anxieties and frustrations with the country’s disastrous economic and political situation.
“I’m lucky because I’m still in work,” he says. “But my mother’s pension was cut last year and she’s struggling. It’s a relief to get out there and discuss stuff – and maybe the protest will help make things less bad.”
In addition to promoting public debate, the Indignants have succeeded in reducing violence at demonstrations by chasing off hooded extremists who mingle with marchers and trigger clashes with riot police. They have even scrubbed the tarmac around the square to remove the chemical residue left by tear gas. But Stelios admits the protesters’ chances of persuading MPs to vote down a €28bn ($40bn) austerity package are slim. “Greece is broke – we need the money, so the European Union and the International Monetary Fund hold all the cards,” he says.
If the package is rejected, George Papandreou, the prime minister, will have to call a snap election. Greece would not receive a €12bn loan tranche due in July and would risk defaulting on repayments of principal and interest on its debt.
In a traumatic political week, Mr Papandreou mooted and then dropped a plan to form a national unity government, then made concessions to hardliners in his Pan-Hellenic Socialist Movement in a cabinet reshuffle. On Friday, he replaced George Papaconstantinou, the finance minister who has been berated both by the EU and IMF for failing adequately to improve tax revenues and cut spending, and by Greeks for cutting salaries and pensions by about 20 per cent.
Mr Papaconstantinou was moved to the energy ministry to handle another tough job: pushing through regulatory reform and handling the privatisation of the state electricity utility in the face of resistance by its trade union.
The political upheavals appear to have caught leaders in Brussels and other European capitals by surprise. For months, officials at the European Commission and in the continent’s largest countries had been locked in debate over a new €120bn bail-out for Greece. That pitted Germany against the Frankfurt-based European Central Bank over how to treat private holders of Greek bonds in a new rescue.
According to officials involved in the deliberations, European leaders began waking up to the coming financial car crash in April in Washington, where several were attending a regular meeting of Group of 20 finance ministers. On the sidelines, says one attendee, Tim Geithner, the US Treasury secretary, pulled Europeans aside and gave them a blunt warning: the IMF, in which the US is the largest stakeholder, might have problems disbursing its June aid payment to Greece because it was unclear that Athens could pay its bills under its current €110bn bail-out. Without the money, Greece would default in July.
EU leaders, aware that they did not have an answer for Mr Geithner, convened a secret meeting in Luxembourg. In order not to spook the markets, the gathering was kept small – mainly comprising eurozone finance ministers who had been in Washington, as well as Jean-Claude Trichet, the ECB chief. But they also invited the man at the centre of the storm: Mr Papaconstantinou. Word leaked out, shaking the markets amid rumours that the ministers were discussing a Greek withdrawal from the euro.
Yet the reality was nearly as stark: Mr Papaconstantinou was harangued for not getting a long-promised privatisation programme started and failing to keep Greece on course for deficit targets it had agreed to when the bail-out was launched a year earlier.
After the tongue-lashing, the assembled ministers tried to hash out a solution. But to the chagrin of Mr Trichet, Wolfgang Schäuble, German finance minister, was insisting that this time, bondholders had to share the pain – a “soft” restructuring that would force them to accept new bonds with longer repayment schedules. According to people briefed on the meeting, Mr Trichet became so incensed that he walked out after only an hour.
The bust-up would set the tone for weeks of acrimonious deliberations, with both the ECB and the German government digging in their heels. Only on Friday, with Greece on the brink, did Germany back down. After a Berlin summit with French President Nicolas Sarkozy, chancellor Angela Merkel agreed to a less coercive plan to ask bondholders voluntarily to buy longer-maturing Greek bonds once current holdings expire.
. . .
Even as high policy was being fought over in Brussels, Berlin and Frankfurt, however, signs that low politics were unravelling in Athens began to emerge. The first sign of trouble came during negotiations between Greece and the so-called troika – the IMF, ECB and European Commission – of representatives for bail-out lenders.
Talks dragged out after it became clear just what troika officials wanted: to make Greece’s €50bn privatisation programme happen, outsiders were to be brought in to run it. Because Greece seemed incapable of collecting taxes, international experts would come in to do that, too. “Greece is like an EU candidate country,” says one official involved. “Croatia has a better tax collection system.”
Such ceding of sovereignty grated in Athens. Greek officials warned that voters – who unlike their Irish and Portuguese counterparts had not yet turned against the government for accepting a bail-out – were beginning to go sour on the whole process.
But creditor countries were adamant, particularly Germany and its northern allies, Finland and the Netherlands. The Dutch pushed for a wholesale takeover of the privatisation programme, urging that it be given to an agency run by international experts. Finland, which had just suffered its own political upheaval when the populist True Finns party came within a hair of winning national elections, insisted that Athens assets should be securitised so they could be used as collateral. If Greece defaulted, lenders would gain an airport or some other utility.
After a month of bitter negotiations, the deal that was struck was not so drastic. But it was close. According to a leaked copy of the troika’s main findings, the new Greek cuts would include a drastic shrinking of the public payroll – only one person could be hired for every 10 exits for the rest of 2011, for instance – and pension reductions of €4.2bn. Privatisation would indeed be run by outsiders.
Mr Papandreou was charged with selling the package to the Greek parliament. European leaders had hoped the American-born, British-educated scion of a Greek political dynasty would achieve not only a parliamentary majority but cross-party agreement on the austerity programme. The result instead has been riots in the streets of Athens and a slow but steady stream of defections from Mr Papandreou’s party.
Having sacked Mr Papaconstantinou, Mr Papandreou must now rely on Evangelos Venizelos to sell the plan to an unhappy country – someone who analysts say brings political street smarts to the job but lacks the financial experience that could prove critical.
“The new minister has to understand that conditionality for the next bail-out loan will be much tighter and if Greece doesn’t meet quarterly targets, the consequences will be dire,” says Yannis Stournaras, director of Iobe, an Athens think-tank.
Most analysts and many European officials agree the main reason Greece has fallen behind with its reform programme is a lack of political will. Mr Papandreou’s government dutifully drafted framework laws in line with reform benchmarks set under the current bail-out programme but left gaps to be filled in by ministerial decrees. Months later, many such decrees are languishing in ministers’ in-trays, making the legislation unworkable.
Following cuts last year in civil servants’ salaries, some ministers quietly handed out additional allowances to their staff without informing the finance ministry, says Miranda Xafa, a former Greek representative to the IMF. “Effectively the [previous] ministers sabotaged the programme, believing they could fool the troika,” she says. It helped that the establishment of a central payments agency for public sector workers, another troika requirement, has been delayed.
The reshuffle appears to have boosted Mr Papandreou’s chances of getting the package through parliament. Some are convinced that if he does, Greece may be able to turn its economy around and make good on its promises. Stefanos Manos, who as finance minister launched its first privatisations 20 years ago, says selective spending cuts will help the country quickly achieve the primary budget surpluses needed to eliminate the deficit and make a start on reducing the public debt. Such cuts could include funding for political parties, local broadcasters, and colleges unable to attract enough students to fill courses.
“Can we live without these amenities for the space of three years? If we can, we’ll hit the targets and will have a chance of changing the market’s psychology,” says Mr Manos. “Instead of disappointment and anxiety, we might even see enthusiasm.”
Copyright The Financial Times Limited 2011.
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