Tentative Deal

Tentative Deal Strips Greece of Sovereignty, Makes Debt Relief Dependent on Compliance

by  Yves Smith  

The cost of Greece avoiding a Grexit is submitting to becoming an economic serf of the Eurozone, subject to even more draconian austerity than was ever on the table before. I’ve embedded the statement that sets forth the deal that was tentatively agreed today. The Greek government still has to pass four bills by the 15th and another two by the 22nd to comply. It’s not clear that that will take place.

Due to the hour, there are yet to be detailed analyses up, so I’ll provide quick media reactions and some additional observations. This deal is simply vicious. This is far and away the most one-sided agreement I’ve ever seen, by an insanely large margin. Even the language is shamelessly punitive. For instance, the document repeatedly mentions that all the previous terms under consideration will need to be made vastly more stringent in light of the deterioration of the economy and how the Greek government needs to prostrate itself to gain the trust of the creditors.

As Politics.co.uk puts it (hat tip Swedish Lex):

As the dust settles this morning on the Greek bailout crisis, it is increasingly clear we are witnessing one of the most daring raids on national democracy in post-war political history. If this new plan passes the Greek parliament, Greece can no longer be said to be a genuinely sovereign state. Brussels and Berlin are taking over Athens. Even one of Alexis Tsipras’ minor victories – that a £50 billion privatisation fund would be based in Athens, not Luxembourg – was entirely superficial. As Angela Merkel insisted this morning, it would not be under Greek control.

The fact that Greece is even considering it means that they recognize what we have argued: that a Grexit would be such a cataclysm that even this dreadful deal would be considerably less costly to Greece and its citizens. But this is like asking someone to choose between cutting off an arm versus cutting off both legs.

This gives an idea of the crumbs that Tsipras was fighting to salvage. According to the Financial Times:

Mr Tsipras succeeded in removing from the final statement a German-proposed sentence saying that, in the event of rescue plans failing, “Greece should be offered swift negotiations on a timeout from the euro area”. Ms Merkel later said there was no Plan B and there would be no discussion of a Grexit without agreement with Greece.

And here is the overview:

Under the planned deal, the stricken Greek economy would receive its third rescue in five years, a three-year programme, funded mainly by the ESM (European stability mechanism) , the eurozone rescue fund, and by the International Monetary Fund.

Mr Tsipras has promised to pass tough new reform laws, including on tax and pensions, by Wednesday and prepare further rapid reforms, such as labour market liberalisation, opening up closed professions, deregulating Sunday trading and reinforcing the financial sector. In a particularly humbling move, the government has to reverse some of the extra spending measures it introduced earlier this year, when it trumpeted its ambitions to end five years of EU-imposed austerity.

The major terms include:

Increasing and simplify VAT

Cutting pensions. More on that shortly. The terms here look to be vastly worse than the cuts Greece fought a few weeks ago

“Requesting” continued IMF “support” (monitoring as well as financing)

“Introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions”

Sequestering €50 billion of assets, nominally supervised by Greece but under strict oversight of the creditors. Half will go to recapitalizing the banking system

Implementing labor market “reforms” along the lines sought by the creditors

Not only is there no debt relief, there is no prospect of any debt relief unless Greece meets targets. And forget about principal reduction. From the letter:

…the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme and will be considered after the first positive completion of a review.

The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken.

And it’s Greece’s fault that it is having trouble with its debt loads. From earlier in the document:

There are serious concerns regarding the sustainability of Greek debt. This is due to the easing of policies during the last twelve months, which resulted in the recent deterioration in the domestic macroeconomic and financial environment. The Euro Summit recalls that the euro area Member States have, throughout the last few years, adopted a remarkable set of measures supporting Greece’s debt sustainability, which have smoothed Greece’s debt servicing path and reduced costs significantly.

I’ve seen nothing in the media reports or the Twittersphere (I have not had the time to check it extensively) that suggests that the ECB is going to let up on the Greek banks today. It’s not clear how they limp through till Thursday if they are utterly drained of cash. Do they simply freeze all operations? In the meantime, suppliers will remain unable to bring anything in, which means intensifying shortages of drugs, particularly insulin, and the start of food shortages. The document takes the airy posture that dealing with the banking system is a tiresome detail that can wait:

The Euro Summit is aware that a rapid decision on a new programme is a condition to allow banks to reopen, thus avoiding an increase in the total financing envelope. The ECB/SSM will conduct a comprehensive assessment after the summer. The overall buffer will cater for possible capital shortfalls following the comprehensive assessment after the legal framework is applied.

Rapid decision on a new program? Does that mean getting the “first set of measures” as in the initial six sets of bills due to be passed by the 22nd, or the more detailed resolving of the updated “proposals” which will take more time? I’m leaving reader comments open (but please play nicely!) so that readers can post links and tweets as more analysis comes in.

Now to pensions. I must confess to not being certain what the critical highlighted section means, but if it means anything within hailing distance of Nathan Tankus’ and my best guess, the pension system is about to be gutted. This is the reference to what Greece needs to agree with the Institutions regarding pensions (emphasis ours):

….carry out ambitious pension reforms and specify policies to fully compensate for the fiscal impact of the Constitutional Court ruling on the 2012 pension reform and to implement the zero deficit clause or mutually agreeable alternative measures by October 2015.

That would seem to mean that Greece needs to fund its pensions from dedicated sources with no deficits. I have no idea whether any Greek tax sources are segregated to pay for pensions, analogous to America’s payroll tax which funds Social Security. The only other source would presumably be pension assets. A post by LOL Greece examined the Greek pension system in some detail.* This gives you an idea how much it falls short of being able to pay pensions:

To cut a long story short, the total assets of the greek social security funds would not pay for ten months’ worth of pensions and benefits, even if we could somehow liquidate them all without causing a fire sale. I have nothing but respect for the actuarial profession, but an actuary’s work right now would not be to discuss what pensions are affordable or what the pensionable age ought to be; it would be to discuss how much of the Greek public sector’s wealth would need to be injected into the funds to make them halfway viable while targeting modest outcomes.

If this take is correct, it means Greek pensions are about to be cut to close to nothing. The 1% of GDP reduction in pensions that Syriza rejected would be a paper cut compared to the wholesale gutting that we fear is in the offing. Any informed comment here would be very much appreciated.

And anyone who has been following the Greece saga for a while knows the efforts to pluck Greece of assets aren’t good cash generators. Again, they seem designed more to satisfy either a foolish need to try to make accounts sum up when they won’t or now, sheer vindictiveness.