FinMin to WSJ: Debt relief, less austerity and greater liquidity will end Greece’s economic, fiscal woes

18 November 2016
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Greek Finance Minister Euclid Tsakalotos spelled out his leftist government’s “dream scenario” to finally emerge from a punishing economic crisis and a continuing reliance on European creditors’ bailout loans, pointing directly to German acquiescence on immediate debt relief, IMF pressure to ease austerity and resumed ECB acceptance of Greek bonds as collateral for its QE program.

His comments were carried in an interview with two WSJ reporters in Athens.

Tsakalotos emphasized the support by the three different parties – Germany, the IMF and the ECB – which have been part of a coterie of institutional creditors propping up Athens since the first memorandum in 2010 – creditors, however, who have often expressed divergent views on how to proceed with the Greek program.

For instance, the IMF is not a lending party in the current program (third bailout) and will decide if it will rejoin probably at the end of the year or early 2017, pending a report on the Greek debt’s sustainability. Berlin, on the other hand, is opposed to any discussion on debt relief before 2018.

Even more telling is an admission by Tsakalotos, a leftwing UK-based economics professor before entering politics in his ancestral Greece, that his ruling SYRIZA party bears some fault for the rise of anti-establishment populism in various western countries over the past few years.

The interview, as released by the ministry, reads:
WSJ: Are we watching the beginning of the end of the West?
Euclid Tsakalotos: I grew up in Britain with the pendulum theory of politics. Things swing back and forward. I think there has been a move away from liberal democratic values in a number of countries in Europe and outside Europe. That’s partly the fault of the center-left and the left. They haven’t really articulated a program that addresses the concerns of voters – an agenda so that people can see their place in a more globalized world economy.
If you think about the promise of globalization in the years of Blair and Clinton, it was that only people in old industries like textiles or steel have something to worry about. But it became very obvious that in fact many middle class people had a lot to worry about. There is a threat to wages and prosperity and security that is more widespread and I think that the center, the center left, and the left have been actually rather poor in responding to that.
So the answer to your question is no.
WSJ: What is the new balance of forces for Greece? With the rise in populism in Europe, Germany is reluctant to give debt relief.
ET: If they don’t give debt relief it will be very short-sighted of them. If the eurozone is going to survive, the number-one requirement is to make sure people see that the eurozone can solve its problems. If it just postpones political decisions and kicks the can down the road, then people will say it’s not working.
Greece doesn’t want the postponement of the debt issue, because Greece thinks that if we kick the can down the road and say “we will decide in two years,” then the investment community will say “well, we will decide in two years.” So we won’t have this clear runway for how we’re going to get out of this (bailout) program in 2018.
WSJ: Does Obama’s reference to the Greek debt make any difference?
ET: I sincerely hope so, we shall have to see. He is a very prestigious politician; he is very popular in Europe.
WSJ: But he has been calling for debt relief for many years and now he is on his way out.
ET: Would his influence be stronger if Clinton has won? The answer is yes. Does he now have no influence? The answer is no.
WSJ: Where does Greece stand on its path out of the crisis?
ET: We have done an immense amount of reforms, and I think that is accepted by anybody who actually looks at it. Our situation now is we are very close to finishing the second review, and I think that the pressure will be on the Eurogroup members to accept that it’s our turn to have a clear runway out of the crisis.
Our goal is to leave the program in 2018. Let me tell you how you won’t get that, to the disadvantage of both us and our creditors. No debt relief means no [Quantitative Easing]. No QE means no access to the markets in late 2017, early 2018. It would be very short-sighted to stop the process that would bring us out of the program, which is within reach.
And I would say that reducing the fiscal surpluses post 2018, let’s say from 3.5% to 2.5%, doesn’t translate to very much cost, if at all, for the man outside Lidl in Hamburg. For such a small ask, to put at risk Greece’s ability to leave the program doesn’t seem sensible.
WSJ: Is the problem a reluctance to talk about the debt before the German elections?
ET: That would be the case if, in fact, doing more on debt relief does translate very much to a cost for the man or woman in Hamburg. But if I’m right and it doesn’t, then it must be about a lack of trust in us, if the creditors give in on debt. And that’s what I suspect was behind yesterday’s statement by Wolfgang Schäuble that it would be a disservice to Greece if to give them some debt relief, because then Greece would stop doing reforms.
My own view is that at some stage in the relationship you have to trust the other person, because there are huge costs to lack of trust.
We actually need some fiscal space, because our creditors should be the first to recognize that we are overtaxing businesses. So we are shooting ourselves in the foot by not having some debt relief that would give us some fiscal space to be able to alleviate the burden on especially small businesses. That’s not going back to the bad old ways; that is creating a development path for Greece to grow out of the crisis.
WSJ: What are the toughest issues in the review?
ET: There is a difficulty with the IMF not being as helpful as it could on the sequence. It sometimes gives the impression that it puts more pressure on Greece than it does to the European partners to do debt relief.
We say that the debt and the fiscal targets should be discussed together. If the fiscal targets are going to be discussed first, then debt relief is going to be the residual, and that is music to the ears of those countries that don’t really want to give much debt relief. So we are trying to convince the IMF that we should hold back on that (fiscal) conversation and have it a package with debt relief.
The (other) main difficult issue is the labor market, where we have both economic evidence and best European practice on our side. We don’t want to increase the amount of people you can dismiss in large firms. First we don’t have many large firms and second it’s not the case that employment-protection legislation affects the equilibrium level of unemployment. You employ more on the upswing and you lay off more in the downswing; the average level of employment remains the same.
Also this is an identity question for the left. This is a decision about the power of capital and labor in society, and you cannot weaken labor further, especially when there is 25% unemployment. It is completely unacceptable for a left-wing government. And it nicely brings us back to your first question, if the workers do not that they are participating in the benefits of growth and we will get a lot of more right-wing populists. If Greece is going to survive and come out of this crisis with some kind of social consensus, then in the upswing the working class and middle class must feel that they are participating. It’s can’t be that they have made sacrifices and now all the benefits will be going to capital.
WSJ: Would you prefer IMF in or out (of the bailout program)?
ET: My first preference is IMF in, my second preference is IMF out, my worst outcome is no decision. Because this no-decision is costing Greece through uncertainty and investors don’t know what’s going on. So what I do want is a decision, I want it to be sorted out, I don’t want them to say we will decide next summer, next Christmas or even later.
WSJ: Would an agreement on the so-called “short-term” debt measures be enough to remove the uncertainty?
ET: No I don’t think it would be enough, it will be more than I initially estimated, but not enough to unleash the virtuous circle.
WSJ: When do you think Syriza might call elections?
ET: Unless the worst scenario (on debt and recovery) comes about, I can’t see Syriza going to elections in 2017. I can’t see any reason, economically and politically, to do so. There was a lot of skepticism over whether we could close the first review; there is a lot of skepticism about whether we can close the second review, whether we can get into QE, and whether we will return to growth. If all these things happen, then the political climate this time next year will be very different.

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