Thursday, February 9, 2012

Germany plays with Greece

If you believe what you read in the paper, Europe is on the verge of yet another Greek rescue package intended to prevent default next month when EUR ~14 billion in Greek government bonds become due.

The deal has the following elements:

1. Greece (all parties) agrees to an austerity diktat issued by the Eurogroup (formerly known as the Troika). The parties must sign and parliament must pass enabling legislation this weekend. No dawdling this time.

2. Private-sector bondholders agree to a debt swap in which they receive worthless paper in exchange for worthless paper with a higher fictitious face value. All bondolders must agree or else holdouts will be forced to exchange, resulting in an involuntary default. This deal has been “almost done” for weeks. The deadline is Monday.

3. The Eurogroup will lend Greece either EUR 130 or 145 billion in order to keep it afloat for the rest of 2012 (if you believe in the Easter Bunny).

The psychology here is interesting. The Germans are in an emotionally conflicted position. Bailing out Greece is a small price to pay for European financial stability. But the whole exercise sticks in the German craw, especially since the Greeks will sign anything and do nothing. One part of the German mind wants to get the bailout over with and move on, while the other part wants to push the Greeks over the cliff and watch their well-deserved demise.

This conflict is visible in the prescriptive language of the diktat. The exasperated tone is reminiscent of Austria’s ultimatum to Serbia in 1914 (another case of German frustration with the crafty Balkan mentality). It is a kind of Prussian wishlist of Greek good government reforms, with a utopian flavor:

* A reduction of 22 percent to the minimum wage, currently at 751 euros per month gross, with an additional 10 percent reduction to the basic salary for young people aged under 25.
* A freeze on the minimum wage of three years.
* A freeze on all salary raises until the unemployment level is reduced from its current 19 percent to under 10 percent.
* A reduction in the pensions of employees of state companies OTE telecoms and Public Power Corporation by 15 percent, as well as of seamen by 7 percent.
* Placing in the labor reserve scheme 15,000 state employees by the end of 2012, with the target of reducing general government employment by 150,000 by the end of 2015.
* The reduction from six months to three of the period over which collective sectoral labor agreements continue to be in effect after their expiration. If a new labor agreement is not drawn up in this period, the sector in question will be bound by the basic national standard, without, however, forfeiting benefits for years of service, job hazard, children and education.
* Collective sectoral agreements will have a limited duration of three years, while existing contracts with a 24-month duration will expire in one year from now.
* A reduction in contributions to the IKA Social Security Foundation of 2 percent effective immediately, and an additional 3 percent in 2013.
* A review by end-June of the special salary status of judicial employees, state doctors, diplomats, and police and military personnel.
* The sale by end-June of scheduled share packages in the following state-owned companies: Public Gas Corporation (DEPA), gas distributor DESFA, Hellenic Petroleum (ELPE), betting agency OPAP, the Attica and Thessaloniki water and sewerage companies (EYDAP and EYATH), and the International Broadcasting Center.
* The abolition of permanency for employees at state-owned companies and banks.
* The restriction of tax exemptions, simplification of the value added tax and property tax structure.
* The closure of 200 tax offices across the country by the end of the year.
* The hiring of 1,000 more tax auditors, to bring their total number by the end of April to 2,000.
* Eliminating the extension of payment terms for overdue taxes and social security contributions.
* A further reduction in military spending by 0.15 percent of GDP.
* The recapitalization of Greek banks through common shares with limited voting rights and through contingent convertible bonds.

Quite a list, no? All that’s missing are German gendarmes stationed at Greek customs posts. Does the list bear any relation to Greece’s future budgetary policy? No.

None of this will happen. The Greeks know this and the Germans know this. But it is intended to provide sufficient political cover for the Bundestag to pass the bailout legislation, which Merkel's coalition will ensure.

The bailout will go through and the Greek saga will last a bit longer. To the extent that any aspects of the diktat are implemented in fact, we will have more ITV footage of the usual riots, etc. I would not expect the Papademos government to fall, because the parties and the army want to have nothing to do with these measures. The parties want to return after the explosion, not before.

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