Wall Street History

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Wall Street History

07/24/2015

And Now the Negotiations Begin

Following are some of the terms of the third Greek bailout, though actual negotiations are just beginning. And they will be tough.

Robert Plummer of BBC News discussed the main areas of economic reform that Greece has conditionally agreed to.

In a nutshell: taxation, pensions, the labor markets, banks and privatization.

-- The agreement refers to “the streamlining of the VAT system and the broadening of the tax base to increase revenue.” It seems that more items will be subject to the country’s top VAT rate of 23%, including restaurants, while popular holiday destinations in the Greek islands will no longer benefit from a lower VAT rate. Corporation tax will also go up, to 28%.

-- There will be “upfront measures to improve long-term sustainability of the pension system as part of a comprehensive reform program.” That means the retirement age will rise to 67 by the year 2022, while aid to the poorest pensioners will be phased out by the end of 2019.

-- Labor markets will be liberalized, as will shop opening hours, with “rigorous reviews and modernization of collective bargaining, industrial action and, in line with the relevant EU directive and best practice, collective dismissals.” The Greek government sternly warned that the country’s past approach is “not compatible with the goals of promoting sustainable and inclusive growth.”

-- Greece must “adopt the necessary steps to strengthen the financial sector.” This means taking tougher action on non-performing loans and strengthening banking governance, including “eliminating any possibility for political interference, especially in appointment processes.” In fact, the deal calls for a specific program for “de-politicizing the Greek administration.”

--The electricity transmission network is to be sold off as part of “a significantly scaled-up privatization program with improved governance.”

Q: Privatization has been a key sticking point in all this. How is that “improved governance” going to be achieved?

Robert Plummer: This is one of the most far-reaching aspects of the deal. The text of the summit statement says: “Valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatizations and other means.”

It says the fund will be established in Greece and managed by Greek authorities, but “under the supervision of the relevant European institutions” – that is, the European Central Bank and the European Commission, which, along with the International Monetary Fund, have been supervising Greek finances throughout the crisis.

In effect, this is being seen as a trust fund outside the control of the Greek government, which can cherry-pick Greek assets and dispose of them in order to repay the country’s debts.

The summit document quotes a figure of 50bn euro for the value of the fund. Of that, half will go towards recapitalizing the country’s cash-strapped banks, whose health – or lack of it – has been so much under scrutiny in recent months.

A quarter of the proceeds of the fund will be used for reducing Greece’s debt-to-GDP ratio, while the remaining 12.5bn will be used for investments in Greece.

Q: Does all this mean that Greece is rescued?

Robert Plummer: As far as eurozone leaders are concerned, these conditions are necessary, but not sufficient, and they will not tolerate any backsliding.

As their statement says: “The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities. However, the euro summit made clear that the start of negotiations does not preclude any final possible agreement on a new ESM program.”

The ESM is the European Stability Mechanism, the eurozone’s rescue fund. The document says that the summit “takes note of the possible program financing needs of between 82bn euro and 86bn.”

It also “takes note” of Greece’s “urgent financing needs” of 7bn by 20 July and another 5bn by the middle of August.

Note: Monday, July 20, Greece did make up its 2bn euro in arrears with the IMF as well as a debt payment to the ECB after receiving “cash for reforms.”

But, again, now it’s about reaching a final deal on the 82bn-86bn euro third bailout. Negotiations will take months.

Wall Street History will return in two weeks.

Brian Trumbore

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