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June 19, 2015

Greek Deal or Tragedy? Someone's Got to Give

Through the venomous comments and erosion of trust, the broad framework of what couple proves to be a workable compromise over Greece's financial crisis may be emerging. This is not to suggest that the Eurozone finance ministers meeting will reach any important decision.

Indeed, the Greek Prime Minister has already reduced his finance minister's role in the negotiations, and it appears Merkel has done something vaguely similar. Schaeuble did not favor the second aid package to Greece. Instead, he reportedly argued to use the time and funds to facilitate a non-disruptive exit for Greece. Merkel eventually went the other way. Even now, she seems more committed to keeping Greece in that is her finance minister, but Germany, no less than Greece, is willing to repeat Draghi's pledge to do whatever is necessary.

Part of what is necessary is to change the language. Many may scoff at the dropping of the use of "Troika" but symbols are very important in this context. Greek officials have indicated a willingness to reform the pension system and VAT. They do not agree on foisting more austerity through cutting current benefits or hiking the VAT. The reforms could generate additional savings over time.

The differences between what the creditors demand and what Greece has been willing to offer is estimated by the EC to be two bln euros a year. The forecasts that this is based are, frankly, not so precise. This is not unbridgeable.

Greece agrees with the IMF in that some sort of debt relief is necessary. The IMF, as we have noted, are very generous with European taxpayers’ money, but would not want to participate in a debt relief exercise. Still, as part of a compromise, the EU could renew their November 2012 pledge to offer some debt relief to Greece.

Recall that in 2012, the EU offered this on condition that Greece achieved the primary budget surplus that was part of the agreement codified into the (in) famous Memorandum of Understanding (MoU). Despite the moralism that of honoring debt obligations and the like (indeed in German and Dutch, the word for debt and guilt are the same), the 2012 pledge shows that, at least at highest levels, it is a political, not a moral issue.

Greece wants a stronger commitment. This too does not seem to be a ridiculous request. After all, Greece did achieve a primary surplus in 2013 and 2014, and there was not a word about debt relief. The debt relief envisaged in the MoU included "further measures of assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction in Greek debt-to-GDP ratio." Moreover, a more detailed pledge along the same lines would also improve the IMF's attitude.

It would also be helpful for the official creditors to acknowledge both the depth of the economic (as opposed to financial) crisis and the important adjustments that Greece has already made. Consider that the real economy has contracted by more than 25%. This then flatters measures, such as debt, as a percentage of GDP. Real spending fell even more. It appears to have contracted by 33%. The cyclically adjusted balance improved by 20% of GDP since 2009. The external deficit improved by 16% of GDP. Unemployment quadrupled to near 28% from 2008 to 2013. Government employment fell by nearly a third in the 2009-2014 period.

A word on Greek pensions is also in order as it is a key sticking point. Greek's pension system is more than just taking care of elderly people. It has supplemented the weak social safety net. A study conducted last year by Greece's employer association found that pensions are the main, and frequently, the only source of income for almost 50% of Greek families. Only about a third of Greek household rely primarily on salaries.

What is often not appreciated by observers is that Greek unemployment benefits (remember a quarter of the workforce is unemployed and 50% of the young people) are capped a little more than 10 euros a day (360 euros a month) and are often limited to a one year period. The economic crisis is five years old. As workers are made redundant, many qualify for early retirement schemes. The Greek pension problem and the high unemployment are linked in a profound way that escapes the attention of most observers.

Greece's pension system is in desperate need for reform, and this is something that the previous governments failed to deliver. One hand, it looks like the most expensive program in the EU at 17.5% of GDP. However, again the implosion of GDP exaggerates this metric. There were over 130 different pension funds. Surely, consolidation and achieving economies of scale would generate savings. The system is subject to widespread fraud (an official review in 2012 as part of aid package found 90,000 fraudulent claims and 350,000 "inconsistent claims").

Moreover, there are a large number of professions that have been granted early retirement privileges, which largely reflect the rent-seeking society. Consider that 580 professions, including wind instrument players (gastric reflux) and radio presenters (microbes in microphones) qualify.

Yet the creditors (and other observers) should recognize some reforms have been implemented. The 130+ pension funds have consolidated to 13. The standard retirement age for men has been raised to 67, and since 2010, the public and private sector pensions have been cut from 15% (for the lowest, which is under 500 euros a month) to almost 45% for the highest (3000 euros a month). Now the average pension is 713 euros a month. The typical supplemental pension, generally funded by an industry program, is 169 euros a month. This translates into 60% of pensioners receiving less than 800 euros a month, which leaves 45% living on less than the poverty limit of 665 euros a month.

Courtesy Marc Chandler at Marc to Market via Economy Watch (Article Archive Here)    

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