Greece – Back in the Headlines

How Big is the Shortfall?

By  Pater Tenebrarum

Over the weekend, a report in German news magazine Der Spiegel asserted that Greece's budget shortfall amounts to €20 billion – far more than hitherto assumed. This was immediately denied by the Greek government, but it seems the IMF is playing hardball with Greece this time.

“Greece rebuffed a report in Der Spiegel magazine on Sunday that claimed the country’s budget shortfall is about 20 billion euros, rather than the 13.5 billion euros Athens is discussing with the troika.

The Finance Ministry said that the budget shortfall as it stands will be covered by the 11.5 billion euros in cuts and 2 billion euros in new tax measures that it is negotiating with the troika.

Meanwhile, Kathimerini understands that a hardening in the stance of the International Monetary Fund and its representative in the troika, Poul Thomsen, was behind the Greek government’s inability to reach an agreement last week with its lenders over the 13.5-billion-euro austerity package.

The troika, which includes the European Central Bank and the European Commission, ended talks with the coalition on Friday and its representatives are due back in Athens by next Tuesday at the latest.

Following negotiations with Finance Minister Yannis Stournaras on Friday, about a third of the 13.5 billion euros in measures remained to be agreed between the two sides.

Government sources said that Thomsen had raised objections to the coalition’s proposals throughout the week and had persisted with the need for further cuts to wages and pensions in order to complete the package.

Amid tense exchanges between Stournaras and Thomsen, the IMF official is said to have been unmoved by the finance minister’s concerns about the survival of the three-party government should the cuts be deeper than expected.” (emphasis added)

In our opinion that tough stance of the IMF representative is actually the more important news (of course if the shortfall really were to amount to €20 billion, the latest negotiations would make little sense, but this is speculation at this point). 

Possible Exit and the Status of the Euro

France reportedly supports an 'easing of bailout terms' for Greece,  which no doubt has something to do with the exposure of France's banks to Greece and other 'PIIGS' members. There were already rumors last week that public sector lenders to Greece are considering a 'second haircut', as Greece can obviously never pay the debt back. Reportedly it is the IMF that is pushing for this move.

FRANCE HAS said Greece should be given more time to meet the terms of its international bailout, the clearest call to date by a leading euro zone country for an easing of the stringent conditions attached to the €174 billion rescue package. 

Jean-Marc Ayrault, the prime minister, taking a clear swipe at Germany, warned that a Greek exit from the euro zone would be “unmanageable” and could be “the beginning of the end of the European project”. (emphasis added)

In Germany there seems to be a widespread view that the euro area can 'survive' a Greek exit. We are not so sure about that. Ayrault may well have a point. For one thing, it could be that France will be forced to bail out a big bank or two if Greece keels over. This would throw doubts on France's ability to reach its deficit goals. Moreover, a Greek exit would be a signal that should not be underestimated – it would ipso facto demonstrate that the euro is no longer 'irreversible'. 

Already there is another wave of strikes an protests looming in Greece over the new austerity measures based on the current official shortfall estimate. It is a good bet that the current government coalition would not survive the imposition of even more stringent measures. If Greece were to lose yet another government, a default would become nigh inevitable – recall that the inability to form a government earlier this year was one of the reasons why the budget gap widened again. The euro area may yet stumble over one of its smallest members.

In this context note also that the leader of the ruling party in Cyprus recently mulled a euro exit by Cyprus in the event that the Troika's demands in return for a bailout should prove too harsh.

The crisis is far from over, in spite of the recent ECB induced euphoria interlude. In fact it appears as though a number of problems that have simmered in the background while Spain's troubles held everyone's attention are threatening to surface with a vengeance again.