This coming week is the deadline to reach an agreement
between Greece and its creditors at the Eurogroup meeting on Thursday. Earlier
last week all sides were seeking an agreement and Greece was optimistic on an
agreement, so it spread up the process by closing up gaps.
However the President of the European Commission,
acting as an intermediary, could not find a common ground to present to Greece,
because the IMF backed out the last minute. It insists that the pensions should
be cut, and as a matter of fact, the representative at a press answer question
session, gave some statistics. He said that Germany’s budget contribution to
the pension system is 2.5%, while that of Greece, it exceeds 10%. Of course the
GDP of both nations cannot be compared..
The IMF also wants to increase taxes and reduce wages
in the public sector, while as for the primary surplus, although it agreed for
about 1% for 2015, it took it back. The reason why IMF is torpedoing the
agreement is because it is against the political solution sought by the EU. As
a matter of fact, a German newspaper (Franfurter Allgemeine Zeitung) reported
that the agreement was ready, the IMF greed to a below 1% primary surplus, it
would have postponed the cuts in low pensions, in return for a cut in the 400
million euros military budget. But the next day it took back its word.
The IMF seems to be on Greece’s side with respect to
the Greek debt. It maintains a solid position that the debt is unsustainable
and should be cut, while the EU believes it is. I have heard many views on the
Greek debt. Today a professor at the Stern school of business, at NYU, said on
Greek Sunday morning TV show, that the debt is sustainable.
His view is that Greece is currently paying low
interest rates, and as long as they are low, and not floating, Greek bonds
could be extended from 15 – 25 years to 75 years, thus reducing the present
value of the bonds. This in my view is financially correct.
Default is now more condensed in the atmosphere that
ever. Up to date the ECB (European Central Bank) has loaned Greece 100 billion
euros for the Greek banking system via the ELA. If Greece (Greek officials) is naive
enough to let the country default, the ECB may ask back this amount thus
raising the Greek debt, and banks will be forced to close. But before that
capital controls will be imposed. We are all hoping this dark day in Greece’s
history will be avoided…
It is true that Greece is now five years in a program
and cannot escape. One good thing that the prior Greek government managed to do
was to bring a balanced budget, and create a primary surplus.
The latest news is that from the office of the prime minister
that the Greek team has handed proposals to cover the fiscal differences –
gaps, despite the fact that the IMF seeks taxes worth 3.5 billion euros, cut in
pension’s equivalent to 1% of GDP. The gridlock though cannot be broken, as the
Greek sides says it will not accept cut in pensions (any more), will not accept
an increase in the sales tax (VAT) of essential goods, or raise the electricity
tax from 13 to 23%.
GOD BE WITH GREECE
Bill T. Alexandratos
