No escape from debtors’ prison for Greece

This article first appeared in The Edge Financial Daily, on September 13, 2017.
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ALEXIS Tsipras is desperate to avoid “suffocating supervision” of Greece’s actions when the country’s third bailout programme ends next August. At the weekend, he promised as much. But the best the Greek prime minister can hope for is that Athens will move from its current high-security prison to an open one — and that will happen only if he behaves.

Tsipras wants a clean exit from the €86 billion bailout so he has a good story to tell Greek voters in advance of an election that has to be held no later than September 2019. The socialist leader is currently trailing the conservative opposition in the opinion polls because of a string of broken promises and errors that have damaged the economy.

However, if Greece could escape its debtors’ prison — which involves detailed monitoring of the government’s actions by the eurozone and the International Monetary Fund (IMF) and is seen as an affront to national pride — Tsipras might conceivably win a future election. Failing that, he might at least avoid an electoral wipe-out and live to fight another day.

But complete escape from surveillance after the bailout deal ends is not realistic — and Tsipras himself probably knows that, though he is keen to tell the Greek people otherwise. Too much money is at stake to leave Athens to its own devices.

The eurozone and IMF have lent the country about €260 billion since 2010. Without monitoring, there would be nothing to stop Tsipras giving full expression to his populist tendencies. He might unwind reforms to pensions, labour markets and public spending. The fiscal deficit might balloon again.

Despite a near-death experience in 2015, when Tsipras’ brinkmanship nearly led to the collapse of the banking system, Greece was able to raise €3 billion from the bond market in July. Athens might be able to repeat the exercise once or twice more before the end of the current bailout programme. It will then not face a cash crunch in 2018. Unfortunately, Athens needs to repay about €15 billion in 2019 — and it is hard to see it doing this unless the eurozone continues to provide support.

At the minimum, Greece needs help with its unsustainable debt mountain, which is about 170% of gross domestic product (GDP). Private investors were prepared to subscribe to the recent bond issue because the eurozone indicated in June that a debt relief deal would be agreed when the third bailout ends next year. This would delay repayment of its loans by an average of up to 15 years.

But it is unrealistic to suppose that the eurozone will formally agree to such a deal unless Greece sticks to its side of the bargain. In particular, creditors will not want Tsipras to backslide on reforms that have already been implemented, reverse his commitment to bring in further important pension and tax reforms in 2019 and 2020, and break his promise to run a fiscal surplus, before interest payments, of 3.5% of GDP until 2022.

The obvious way of getting Greece to stick to its side of the bargain is to dribble out the debt relief as and when Athens hits milestones. But this will require continued monitoring of the economy. Debt relief alone may not be sufficient for Greece to tap the bond markets to meet its financing needs — especially once the European Central Bank ends its bond-buying programme. Athens will probably also need a precautionary credit line from the eurozone. But such a safety net would come with conditions and supervision.

This would create a problem for Tsipras as he would then struggle to tell a good story to the Greek electorate. He has three main options.

The most sensible approach would be to cooperate with the creditors in the coming months, especially over the next review of the current bailout programme. Technical staff are due in Athens today to start discussions.

Although the review should be less politically charged than the one which ended in June, Tsipras would still have to swallow some unpleasant medicine — for example, by making it harder for workers to strike. The upside is that he would gain goodwill with creditors in advance of the debt relief talks, receive another loan that he could use to stock his war chest and win plaudits from private investors.

All this might give a fair wind to the economy, which is expected to grow about 2% this year. Greece may then conceivably exceed its deficit targets, allowing Tsipras to take measures to soften the blow of the planned pension and tax reforms. This seems to be the prime minister’s current strategy. At the weekend, he called for the review to be completed “with great speed”.

Tsipras’ normal approach, however, is to drag out negotiations rather than go for a quick win — before ultimately coming to heel when he sees there are no other good choices. If he does this, Greece will limp along but not generate goodwill. It will also need more intense monitoring once the bailout ends. Tsipras’ final option is a mad dash for freedom. This would involve calling an early election as soon as the bailout programme ends but without reaching a deal on debt relief or getting a precautionary credit line. Tsipras could tell voters he had escaped the debtors’ prison and there was no more surveillance by foreigners.

The snag is that the freedom would be short-lived. Come 2019, Greece would be back in the prison’s high-security wing. Tsipras himself would by then probably no longer be prime minister but would have handed a poisoned chalice to the opposition.

Such a strategy would be crazy for Greece and is not Tsipras’ current Plan A. But it is unfortunately a scenario that cannot be totally dismissed. — Reuters