There’s nothing wrong with buying time if that’s your need. And Greece’s daring new finance minister Yanis Varoufakis got some when he struck a deal in Brussels Friday to extend the European Union’s bailout for four months.
The markets greeted this news with a big exhale. In New York the Dow Jones average popped to a record. But this is not a done deal by any stretch. Athens merely got past the nerve-wracking Feb. 28 expiration date on the $196 billion bailout now in place.
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That’s a lot, considering the government of Prime Minister Alexis Tsipras was entirely at odds with its creditors even a few days previous to the Friday session. Athens will now present its proposals for new bailout terms in Brussels Monday.
Here are the big questions now:
No. 1: What reforms do the Greeks have to do between now and June to shake loose the pending $8.2 billion tranche of the bailout and negotiate a less-austere economic and fiscal solution to its seven-year crisis?
No. 2: Varoufakis may have bought some time, but did he and Tsipras just buy themselves a Greek ship’s cargo of political trouble, too?
No. 3: How far does the EU have to go in Greece’s direction?
No. 4: How far can it go? What are the political constraints among EU members, notably Germany?
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Let’s look briefly at these.
Greece’s reforms. The list of required reforms is long, but the biggest of them is the size of the primary surplus Athens must achieve, measured as a percentage of GDP. The Memorandum, as the bailout document is known, requires primary surpluses—government revenue after all expenditures except interest payments—of 1.5 percent in 2014, 3 percent this year, and 4.5 percent in 2016.
Athens made last year’s target. But the numbers for this year and next are wholly unrealistic. Everyone knows this, including the bailout troika: the International Monetary Fund, the European Union, and the European Commission. Read the I.M.F.’s discussion papers: Board members knew the targets were fantasies even as the fund negotiated them.
This feature of the bailout now looks like wet cement. Jeroen Dijsselbloem, the Dutch finance minister and the man most responsible for dragging the EU into Friday’s agreement, said they might be renegotiated. They must be.
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Several other reforms can go into the primary surplus file. Tsipras and Varoufakis promised voters to restore previous cuts in public sector pensions, rehire laid-off civil servants, and restore government workers’ wages to pre-bailout levels. These issues are likely to be negotiated in the context of the fiscal target.
So is Greece’s value-added tax. The Memorandum requires Athens to impose an overall rate of 23 percent—unconscionable by any serious reckoning—and the Greeks responded by declaring reduced rates in a variety of categories: 13 percent on restaurant bills, 6.5 percent on books, periodicals, hotel rooms, theater tickets, and some drugs.
Late last year, the troika proposed to reduce the headline rate to 19 percent but make Athens impose it across the board. Again, this is likely to prove a matter for negotiators who can make complicated sets of numbers add up.
Privatizations, including sales of operating concessions at 14 airports, the natural-gas distribution network, and state-run businesses such as hotels and property, are another matter. These were scheduled to bring in $3.2 billion this year. But in the campaign that brought the anti-austerity Syriza party to power, Tspiras promised to reverse those already completed, stop those pending, and cancel those to come.
Since his election, Tsipras has reversed himself on the government’s two-thirds stake in the port of Piraeus. This is big. It could bring in up to $910 million, for one thing. For another, a highly symbolic asset in the land of grand shipbuilders would go to a foreign investor. The leading bidder now is China Cosco Holding Co., a very large operator of container ports.
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Tsipras’s political liabilities. Fed-up Greeks are proving quick on the draw. Tsipras and Varoufakis were instantly charged with betrayal when Friday’s agreement was announced. The other hard reality is the political constellation within Syriza. The party includes a few anti-Nazi partisans (believe it or not), many members who fought in the civil war and then opposed the colonels’ dictatorship, former political prisoners, returned exiles, leftist Greens, and what have you.
It’s a salad, not a melting pot. Those to the left of Tspiras and Varoufakis are emblematic of a long socialist thread in Greek politics, and when the prime minister and finance minister get up from the mahogany tables in Brussels, they have to answer to this many-sided base at home.
The EU’s duties. There are many things Brussels and the troika needs to do now. Three are urgent.
First, Europe has to register the new reality: Tspiras and Varoufakis have come a long way toward the EU position and taken big risks doing so. They may look like raging leftists in Brussels or Berlin, but it’s going to weigh on the outcome if they’re attacked as flip-floppers back home. Cut these two some slack in the interest of a sound resolution.
Second, clean up the act. Scrub the Disneyland fiscal targets, for one thing. For another, accept that the job for the Greeks now is to recover from an ill-conceived recovery strategy. This means paying more than lip-service to the growth-and-jobs imperative that is acknowledged everywhere but not yet reflected in policy.
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Finally, accept that Greece’s cards come to more than a pair of three’s. All in, a Greek default would total close to $342 billion my sources in the global markets tell me. “A Greek default alone,” one wrote in an exchange over the weekend, “would wipe out the European Central Bank’s capital—or, more likely, the ECB would end up with negative equity. And this assumes no one else had any problems, which would be unlikely.”
Europe’s political constraints. If anything, rescuing Greece on new terms is an even harder sell than most of us expected, especially in Germany. It’s possible, however, that the German leadership is treating both Greece and the EU to a good-cop, bad-cop routine.
Wolfgang Shäuble, the finance minister, has been super-hawk in his sessions with Varoufakis the past few weeks. But Chancellor Merkel has suggested many times that compromise is more or less essential: If one negotiating path leads nowhere, try another.
Shäuble is the traditional German, unyielding in his rectitude. Merkel has proven time and again the better European. At the 11th hour, she accepted the ECB’s expanded bond-buying program last month. In the markets, there’s a fair amount of money now on the prospect of another such intervention, by way of which Athens and the EU can be reconciled.
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