There seems to be a strong convergence of interests between the Greek government, the European Commission and Eurozone Member States (and the IMF): they all want a clean exit from the Third Economic Adjustment Programme for Greece. Lorenzo Codogno explains that political motivations may well collide with the need to reduce risks and favour a smooth and successful return to normality with a post-programme in place

Codogno, Lorenzo

LSE Research Online

Greece’s	clean	exit:	Politics	vs	economicsThere	seems	to	be	a	strong	convergence	of	interests	between	the	Greek	government,	the	EuropeanCommission	and	Eurozone	Member	States	(and	the	IMF):	they	all	want	a	clean	exit	from	the	ThirdEconomic	Adjustment	Programme	for	Greece.	Lorenzo	Codogno	explains	that	political	motivationsmay	well	collide	with	the	need	to	reduce	risks	and	favour	a	smooth	and	successful	return	to	normalitywith	a	post-programme	in	place.Clean	exit:	Different	meanings	for	different	actorsFor	a	change,	there	seems	to	be	a	strong	convergence	of	interests	between	the	Greek	government,	the	EuropeanCommission	and	Eurozone	Member	States	(and	the	IMF).	Now,	they	all	want	a	clean	exit	from	the	Third	EconomicAdjustment	Programme	for	Greece.For	the	Greek	government,	it	is	not	just	a	matter	of	pride.	It	would	be	the	demonstration	that	it	has	been	able	tosteward	the	country	out	of	its	troubles,	which	started	with	previous	administrations.	It	would	also	be	a	launch	pad	forthe	next	elections,	which	need	to	be	held	before	20	October	2019	(they	may	be	brought	forward).	For	the	currentEuropean	Commission,	a	clean	exit	would	demonstrate	that	the	recipes	and	the	approach	followed	so	far	haveeventually	borne	fruit.	For	European	leaders,	it	would	be	a	way	to	move	on	and	close	an	uncomfortable	chapter,which	has	taken	so	much	energy	and	effort	in	Brussels,	and	has	produced	so	many	problems	in	the	discussions	backhome	in	national	parliaments	and	in	the	electorate,	to	the	point	of	risking	further	slippage	towards	populist	anti-establishment	movements.Greece	has	successfully	demonstrated	an	ability	to	tap	financial	markets	for	funding,	but	the	7-year	bond	issuancefor	€3bn	in	February	was	unfortunate	as	yield	spreads	have	sharply	widened	since	then,	highlighting	how	risky	thesituation	still	is.	There	is	not	only	a	risk	of	a	possible	rolling	back	of	domestic	policies,	but	also	of	fluctuations	in	theglobal	risk	appetite	beyond	the	control	of	the	Greek	government.A	look	at	the	economyEconomic	developments	turned	out	to	be	more	favourable	than	was	projected	in	summer	2015,	when	the	thirdfinancial	assistance	Programme	was	agreed.	The	country’s	GDP	growth	has	improved	steadily	since	then.	However,not	only	is	there	no	indication	of	any	catching	up	following	the	crisis,	but	also	the	pace	of	growth	remains	below	theEurozone’s	(Figure	1).	Private	consumption	remains	the	weak	spot,	and	this	is	not	surprising.	Gross	investment	as	apercentage	of	GDP	fell	to	about	half	versus	pre-crisis	levels,	with	a	decline	in	the	stock	of	capital.	Now,	confidence	isimproving,	but	actual	output	figures	in	manufacturing	are	somewhat	short	of	confidence	figures.	The	labour	marketkeeps	improving	at	a	slow	pace,	with	overall	unemployment	still	above	20%.Figure	1:	Greece’s	GDP:	No	catching-up	even	on	growthLSE European Politics and Policy (EUROPP) Blog: Greece’s clean exit: Politics vs economics Page 1 of 5		Date originally posted: 2018-04-04Permalink: http://blogs.lse.ac.uk/europpblog/2018/04/04/greeces-clean-exit-politics-vs-economics/Blog homepage: http://blogs.lse.ac.uk/europpblog/Source:	Thomson-Reuters	Datastream,	Eurostat,	LC-MA	calculations.Figure	2:	Greece’s	fiscal	outcomes	exceeding	expectationsSource:	Thomson-Reuters	Datastream,	European	Commission,	LC-MA	calculations;	2018	and	2019	=	projections.The	external	position	has	improved	sharply,	although	more	because	of	weakness	in	domestic	demand	than	strengthin	export	activity.	Export	performance	remains	underwhelming.Greece	has	outperformed	Programme	budget	targets	(Figure	2).	According	to	the	Hellenic	Fiscal	Council,	Greecemay	have	reached	a	3.5%	primary	surplus	in	2017	already,	versus	a	target	of	1.75%.	There	are	reasons	to	beoptimistic	about	Greece	meeting	the	fiscal	targets	in	2018	as	well.	Maintaining	a	3.5%	primary	surplus	also	in	theyears	to	come	appears	feasible.	On	balance,	the	overall	improvement	of	the	fiscal	situation	is	impressive.There	are	also	risks,	however.	Direct	tax	revenues	are	not	performing	very	well.	The	high	rate	of	social	contributionshas	probably	increased	the	area	of	tax	evasion.	The	composition	of	the	fiscal	adjustment	may	become	even	lessgrowth-friendly	(reduced	public	investment)	than	it	is	now.LSE European Politics and Policy (EUROPP) Blog: Greece’s clean exit: Politics vs economics Page 2 of 5		Date originally posted: 2018-04-04Permalink: http://blogs.lse.ac.uk/europpblog/2018/04/04/greeces-clean-exit-politics-vs-economics/Blog homepage: http://blogs.lse.ac.uk/europpblog/The	banking	sector	is	gradually	improving,	also	courtesy	of	strong	recapitalisation,	but	the	stock	of	Non-PerformingExposures	(NPEs)	remains	very	high.	According	to	the	Bank	of	Greece,	it	declined	by	4.8%	in	December	2017compared	to	September	2017,	driven	by	write-offs	and	sales,	and	it	reached	€94.4bn	or	48.6%	of	total	exposures.Total	write-offs	and	sales	for	the	whole	of	2017	reached	€6.5bn	and	€3.6bn	respectively.	The	NPE	ratio	was	43.4%for	residential,	49.3%	for	consumer	and	41.8%	for	the	business	portfolio	at	the	end	of	2017.	The	reduction	target	forthis	year	is	€14.4bn,	a	very	ambitious	one.	Credit	growth	is	still	weak.	According	to	the	Bank	of	Greece,	the	annualgrowth	rate	of	credit	to	the	private	sector	stood	at	-1.0%	in	February,	and	that	of	credit	to	corporations	at	0.2%.Electronic	auctions	appear	now	to	be	working,	and	the	sale	of	loans	is	speeding	up,	but	repairing	the	balance	sheetremains	a	major	challenge.	It	is	not	guaranteed	that	the	four	major	Greek	banks	will	get	the	green	light	in	theforthcoming	banking	stress	tests.	Overall,	the	Greek	economy	is	gradually	healing,	but	a	return	to	a	sustainable	paceof	growth	cannot	be	taken	for	granted.Fourth	review	to	be	completed	by	June	(or	July)			On	12	March,	the	Eurogroup	welcomed	the	completion	of	the	remaining	prior	actions	by	Greece,	as	required	underthe	third	review	of	its	Programme,	including	necessary	actions	in	the	field	of	privatisation,	public	revenue	collection,tax	policy	and	resolution	of	Non-Performing	Loans	(NPLs).	It	effectively	paved	the	way	for	the	release	of	the	fourthtranche	of	financial	assistance.On	27	March,	the	Board	of	Directors	of	the	European	Stability	Mechanism	(ESM)	approved	the	fourth	tranche	of€6.7bn	of	ESM	financial	assistance	for	Greece,	with	the	first	disbursement	of	€5.7bn	already	delivered.	After	thedisbursement,	ESM	financial	assistance	for	Greece	reached	€45.9bn,	out	of	a	total	programme	volume	of	up	to€86bn.	Together	the	ESM	and	the	European	Financial	Stability	Facility	(EFSF)	have	so	far	disbursed	€187.8bn	toGreece.	The	tranche	will	be	used	for	debt	service,	domestic	arrears	clearance	and	for	establishing	a	cash	buffer.Subject	to	another	decision	by	the	ESM	Board	of	Directors,	a	further	disbursement	of	€1bn	may	be	carried	out	after	1May	2018.	It	is	dependent	on	Greece	making	progress	in	reducing	its	stock	of	arrears	and	improving	theeffectiveness	of	the	e-auction	system.There	will	be	some	informal	discussions	on	the	fourth	and	final	review	of	the	Programme	as	early	as	the	nextEurogroup	meeting	in	April.	A	staff-level	agreement	is	expected	in	May	or	early	June,	with	a	final	decision	at	theEurogroup	on	21	June.	Some	officials	have	recently	pointed	to	the	risk	of	a	small	delay	to	July,	due	to	the	fact	thatthe	Greek	government	is	behind	schedule	in	completing	key	deliverables.	At	any	rate,	a	decision	on	the	closure	ofthe	Programme	and	disbursement	must	come	early	enough	to	allow	sufficient	time	for	closure	of	the	Programme	byAugust.A	political	decision	on	debt	relief	in	April	already?There	is	an	ongoing	discussion	on	debt	relief,	again	to	allow	enough	time	to	deliver	everything	by	August,	and	apolitical	decision	may	be	taken	already	in	April.Conditionality	here	is	the	buzzword.	The	IMF	and	the	ECB	are	pushing	for	only	limited	conditionality	to	allow	Greeceto	be	back	on	its	feet	sooner	rather	than	later.	However,	for	debt	relief,	some	form	of	conditionality	is	inevitable	andprobably	desirable.	For	instance,	the	bond-buying	Securities	Markets	Programme	(SMP)	profits	in	the	hands	of	theECB	are	effectively	money	owned	by	the	Member	States,	and	it	would	be	inconceivable	for	them	to	authorisepayment	without	some	strings	attached.	Finally,	especially	ahead	of	elections,	there	is	a	risk	of	slippage	on	the	partof	the	Greek	government	in	case	conditionality	is	not	strong	enough	and	there	are	always	risks	of	external	shocks.Striking	the	right	balance	between	a	‘super-clean	exit’	and	keeping	some	form	of	conditionality	with	contingentfinancing	is	what	negotiators	will	have	to	agree.LSE European Politics and Policy (EUROPP) Blog: Greece’s clean exit: Politics vs economics Page 3 of 5		Date originally posted: 2018-04-04Permalink: http://blogs.lse.ac.uk/europpblog/2018/04/04/greeces-clean-exit-politics-vs-economics/Blog homepage: http://blogs.lse.ac.uk/europpblog/Even	the	IMF	may	come	back	into	the	Programme,	in	case	debt	relief	delivers	significant	enough	changes	to	allowfor	a	profound	revision	of	the	Debt	Sustainability	Analysis	(DSA).	This	could	happen	in	April	already	should	debt	reliefbe	delivered	at	the	same	time.	While	this	would	take	place	just	a	few	months	away	from	the	end	of	the	Programme,making	IMF	participation	mostly	symbolic,	it	would	be	essential	for	the	IMF’s	involvement	in	any	post-programmeinitiative.	For	this,	the	week	between	the	Spring	Meetings	of	the	IMF	in	Washington	(21-22	April)	and	the	Eurogroupmeeting	(27	April),	will	be	crucial.	Negotiators	will	not	miss	the	opportunity	to	address	the	issue	face	to	face	inWashington.	The	IMF	staying	on	board	would	be	important	for	countries	like	the	Netherlands	and	Germany	andfacilitate	a	positive	conclusion.Post-programme	and	contingency	fundingThe	need	for	a	post-programme	arrangement	is	clear.	The	relaxation	of	capital	controls	will	not	be	implemented	byJune,	and	it	will	take	at	least	a	year	for	full	liberalisation	to	avoid	any	risk	of	sudden	capital	outflows.	Moreover,despite	sharply	reduced	financial	needs,	access	to	financial	markets	is	not	granted,	as	suggested	by	the	poorperformance	of	the	bond	recently	issued.	Finally,	the	ECB	waiver	will	expire	at	the	end	of	the	Programme	in	August.Therefore,	a	credit	line	as	liquidity	backstop	would	be	helpful	for	Greece.One	option	would	be	to	go	for	a	precautionary	credit	line,	which	is	part	of	the	still-unused	toolkit	of	the	ESM.	Aprecautionary	credit	line	aims	to	support	sound	policies	and	prevent	crises,	and	it	appears	especially	suitable	for	theGreek	situation.	It	would	help	Greece	to	maintain	access	to	market	financing	by	strengthening	the	credibility	of	itsmacroeconomic	performance	even	after	the	end	of	the	Programme,	likely	complementing	the	building	up	of	cashbuffers.There	are	two	possible	forms.	The	first	is	a	“Precautionary	Conditioned	Credit	Line”	(PCCL),	which	is	available	to	aMember	State	whose	economic	and	financial	situation	is	deemed	to	be	fundamentally	sound,	as	determined	by	sixeligibility	criteria,	such	as	public	debt,	external	position	or	market	access	on	reasonable	terms.The	second	form	would	be	the	so-called	“Enhanced	conditions	credit	line”	(ECCL).	It	is	available	to	Euro	AreaMember	States	whose	economic	and	financial	situation	remains	sound,	but	who	do	not	comply	with	the	eligibilitycriteria	for	a	PCCL.	This	may	well	be	the	case	for	Greece.	The	ESM	Member	is	obliged	to	adopt	corrective	measuresaddressing	such	weaknesses	and	avoiding	future	problems	in	respect	of	access	to	market	financing.	The	ESMMember	has	the	flexibility	to	request	funds	at	any	time	during	the	availability	period.	When	an	ECCL	is	granted,	theESM	Member	is	subject	to	enhanced	surveillance	by	the	European	Commission.	Surveillance	covers	the	country’sfinancial	condition	and	its	financial	system.	The	credit	line	could	also	be	used	for	the	recapitalisation	of	banks.The	problem	with	this	route	is	political	will.	The	Greek	government	would	have	to	ask	for	the	credit	line,	and	it	is	notclear	whether	there	is	any	such	intention.	In	fact,	it	would	not	be	perceived	as	a	‘clean	exit’.	It	would	still	requireconditionality	and	surveillance.	As	demonstrated	by	the	premature	tapping	of	financial	markets,	the	Greekgovernment	is	in	a	hurry	to	show	it	is	back	on	its	feet.Moreover,	such	a	credit	line	would	have	to	pass	approval	in	some	national	parliaments,	such	as	in	Germany,	theNetherlands	and	Finland.	Needless	to	say,	there	is	little	appetite	for	that	in	these	countries	and	much	fatigue	indealing	with	Greek	issues.	The	bottom	line	is	that	no	one	seems	to	be	pushing	for	such	a	liquidity	backstop,	leavingaside	possibly	the	ESM.	The	Eurogroup	will	likely	decide	on	this	contingent	credit	line	on	21	June.Another	option	would	be	to	have	“enhanced	surveillance”	according	to	the	so-called	Two-Pack,	but	this	would	be	avery	intrusive	option,	and	politically	very	delicate.	It	would	need	a	letter	of	intent	by	the	Greek	government,	whichwould	be	a	sort	of	Memorandum	of	Understanding.	It	would	imply	quarterly	monitoring,	and	it	would	overlap	with	theprocedures	of	the	European	Semester.	However,	Member	States	would	not	have	to	ask	for	approval	by	their	nationalparliaments.What	is	going	to	be	good	for	Greece?Volatility	and	lack	of	depth	continue	to	be	key	features	of	the	Greek	government	bond	market,	and	this	makesinvestors	somewhat	reluctant	to	stay	engaged.	Any	small	international	trigger	could	translate	into	significant	losses,and	a	sharp	widening	of	yield	spreads.LSE European Politics and Policy (EUROPP) Blog: Greece’s clean exit: Politics vs economics Page 4 of 5		Date originally posted: 2018-04-04Permalink: http://blogs.lse.ac.uk/europpblog/2018/04/04/greeces-clean-exit-politics-vs-economics/Blog homepage: http://blogs.lse.ac.uk/europpblog/The	deeper	the	debt	relief	in	favour	of	Greece	is	going	to	be,	the	better	for	Greek	financial	assets.	Also,	the	morecomprehensive	the	post-programme	and	the	contingency	funding,	the	less	risky	it	becomes	to	continue	to	invest	inGreece.	In	fact,	after	the	summer,	a	new	uncertain	phase	will	emerge	ahead	of	forthcoming	political	elections,	withthe	risk	of	backsliding	on	reforms	already	introduced.Figure	3:	Yield	spreads	remain	well	above	those	for	other	Eurozone	countriesSource:	Thomson-Reuters	Datastream,	LC-MA	calculations.To	sum	up,	the	short-term	and	the	medium-term	outlook	will	depend	on	the	important	decisions	that	will	beundertaken	by	the	summer	on	debt	relief	and	the	post-programme	monitoring	regime.	Political	reasons	seem	to	be	atodds	with	the	need	to	reduce	risks	and	favour	a	smooth	and	successful	return	to	normality	with	a	post-programme	inplace.Please	read	our	comments	policy	before	commenting.Note:	The	article	gives	the	views	of	the	author,	not	the	position	of	EUROPP	–	European	Politics	and	Policy	or	theLondon	School	of	Economics._________________________________About	the	authorLorenzo	Codogno	–	LSE,	European	InstituteLorenzo	Codogno	is	Visiting	Professor	in	Practice	at	the	LSE’s	European	Institute	and	founder	andchief	economist	of	his	own	consulting	vehicle,	LC	Macro	Advisors	Ltd.	Prior	to	joining	LSE,	LorenzoCodogno	was	chief	economist	and	director	general	at	the	Treasury	Department	of	the	Italian	Ministry	ofEconomy	and	Finance	(May	2006-February	2015).	Throughout	this	period,	he	was	head	of	the	Italiandelegation	at	the	Economic	Policy	Committee	of	the	European	Union,	which	he	chaired	from	Jan	2010to	Dec	2011,	thus	attending	Ecofin/Eurogroup	meetings	with	Ministers.	He	joined	the	Ministry	from	Bank	of	Americawhere	he	had	worked	over	the	previous	11	years.	He	was	managing	director,	senior	economist	and	co-head	ofEuropean	Economics	based	in	London.	Before	that	we	worked	at	the	research	department	of	Unicredit	in	Milan.LSE European Politics and Policy (EUROPP) Blog: Greece’s clean exit: Politics vs economics Page 5 of 5		Date originally posted: 2018-04-04Permalink: http://blogs.lse.ac.uk/europpblog/2018/04/04/greeces-clean-exit-politics-vs-economics/Blog homepage: http://blogs.lse.ac.uk/europpblog/

Greece's clean exit: politics vs economics

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Greece's clean exit: politics vs economics

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