The Greek State of Security & ‘Trust’

July 13, 2015 0 Comments

This weekend began another series of deals, which lasted well until the late nights, until the early morning in Greece. Naturally, Eurogroup officials are no strangers to working long hours of negotiating deals for the betterment of their nation’s economic sustainability. By economic sustainability, I’m of course referring to the Greek economy.

Before the summit began, there were Germany Prime Minister Angela Merkel mentioned about the need to resort ‘Trust’ by enacting key reforms before beginning talks about a financial rescue plan for Greece. Both debtors and creditors can probably agree that this goes both ways. Then again, there are probably very few reasons why Eurogroup members should trust Greece.

As things seemed to be getting worse and worse for Greece, Greek officials were ready to start negotiations, completely given into the original demands of their creditors. As expected, European credits began to flex their muscles, as their proposals became significantly more strict than the original bailout deal last month. The deal was coupled with more austere reforms, more market liberalization, spending cuts, accelerated privatization and pension reform (which is badly needed, anyway).

What a terrible irony the nation faced, and only supported my original assertions about the referendum: completely irrelevant. Some might have even believe the referendum might have given Greece the cards it needed to improve their deal; however, the opposite was true. European Parliament member and member of the Greek Syriza party Dimitrios Papadimoulis mentioned that Greece isn’t trying to work with the nation at all. Instead, their goal is to rather humiliate the fallen nation, which was a sentiment that was shared via Twitter, using the hashtag #ThisIsACoup.

So the leaves Greece with the same options as before: accept the demands of their creditors or be forced out of the Euro. Although, European creditors aren’t the ones who are capable of forcing Greece out. Only the European Central Bank has that power, through the method capital controls from their Emergency Liquidity Assistance. After the referendum, ECB immediately increased haircuts for Greek banks, which may have resulted in banks running out of funds in a matter of days.

It may have been seen as an act of coercion, but then again, ELA was always meant to be a temporary solution anyway. Regardless of the methods used, Greece needed to come up with some economic reforms, and fast.

So what ‘agreement’ did the Greeks ‘capitulated’ to?

  • Streamlining the VAT system and broadening the tax base to increase revenue.
  • upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform program.
  • Timetable for implementing all  OECD toolkit recommendations, including Sunday trade, sales periods, pharmacy ownership, milk and bakeries etc.
  • Privatization of the electricity transmission network operator.
  • Rigorous reviews and modernization of collective bargaining, industrial action in line of EU directive and practices.
  • Labor market policies will be aligned with EU and international best practices.
  • Adopting the necessary steps to strengthen the financial sector, including decisive action on non-performaning loans. Along with measures to strengthen governance of the Hellenic Financial Stability Fund (HFSF).

Most of all, the greatest part of this deal involved the transfer of valuable Greek assets, worth €50 billion, into an existing external and independent fund, to be privatized and decrease the debt. The monetization of these assets will be one source to make the scheduled repayment of the new loan of European Stability Mechanism.

The general life of this loan (€25 billion or 50%) will be used for the repayment and recapitalization of banks and other assets. 50% of the remaining half (50% of €25 billion) will be used to decrease the debt-to-GDP ratio, while the other half will be used for investments. As far as I know, the fund will be established in Greece and managed by the Greek authorities; however, one can guess over who will be managing this fund.

Now all that’s left is for European PMs to vote on the new deal, which will probably get approved without a hitch. The question is, is there enough ‘Trust’ resorted between Greece and their creditors. Things are no doubt far from solved and this is usually the part where I say, “Crisis Adverted. See you in a few months, Greece.” However, I’m thinking that we’re bound to run into another problem sooner rather than later.

2,460 total views, 2 views today