Greek austerity – to be or not to be?

Malta, being the smallest among the Eurozone members, was requested to carry its share of the Greek bailout cost in proportion to its size and financial strength.

Under the previous PN administration agreement was reached that such financial obligations would be honoured on the understanding that the debt would eventually be repaid, and of course this meant that the amount would be recoverable so that no bad debt would impinge on our Excessive Budget mechanism – this was triggered in start of 2012.

Now that budgetary controls over expenditure are showing signs of improvement due to better controls over the purse strings, the government is under pressure to continue in its drive to reduce the annual budget deficit not to exceed the 3% limit of GDP.

However sensing a haircut in the recent Greek debt negotiations Malta is requesting assurances that the debt will be repaid in full, before the consideration of any concessions.

Speaking during a meeting for euro area finance ministers, Edward Scicluna said Malta helped Greece in its hour of need, borrowing to loan the country almost €200 million, equivalent to 2.4 per cent of Malta’s gross domestic product. Our exposure to Greece comes in two parts: a €50 million bilateral loan and €138 million as guarantees to the European Financial Stability Facility (EFSF), set up as a temporary rescue mechanism in 2010.

It is relevant to recall how Greece was bailed out in 2010 as it crumbled under the weight of the financial crisis. The deal involving billions was not without strings attached – it was given on condition that the country implemented austerity measures to trim excessive public spending. This included sacking excess civil servants in public institutions and making pension cuts, with the result that such austerity has hit hard and wide, leaving millions in poverty.

With unemployment soaring at 25 per cent, the last election saw a sea change in voter sentiment, which turned to electing a far-left party, Syriza, led by the charismatic and young Alexis Tsipras. The firebrand was full of promises to the electorate that things would improve and the bailout conditions be rewritten. He wanted to try all options, having received a strong political mandate to relieve Greeks from the heavy mantle of austerity over the past four years which some contend had impoverished the nation. 

The aim of Syriza is to renegotiate some of the terms and conditions of the €240bn bailout agreed with the so-called troika (the European Commission, the European Central Bank and the International Monetary Fund) since 2010. Its preferred option is to swap a significant chunk of debt for bonds linked to future economic growth. Opinion polls suggest that a growing number of people like the fact that Greece is trying to stand up for itself, and is taking its argument to the rest of Europe.

The headline-grabbing Syriza policy that has shaken the eurozone was  a promise to write off most of Greece’s €319bn while Syriza also wants repayment of the debt to be linked to economic growth, not the Greek budget, plus a “significant moratorium” on debt payments.

What exactly is Tsipras promising his people?

To start with, the most vote-catching is the promise of 300,000 new jobs in the private, public and social sectors, and a hefty increase in the minimum monthly wage – from €580 to €751. The new jobs would focus on the young unemployed – almost 50% of under-25s are out of work – and the long-term unemployed, especially those over 55.

Another reform will be to buttress the pensions which were slashed as part of the austerity programme. In fact both salaries and pensions suffered a haircut in 2012 as part of Greece’s austerity measure to curb spending. Now Syriza aims to reverse many of those “injustices”, bringing back the Christmas bonus pension, known as the 13th month, for pensioners receiving less than €700 a month.

Simply put, the reform can be summarized in four chapters. The chapters include improving the humanitarian crisis, the economy and promoting tax justice while slowly creating new sustainable jobs. Naturally the lax political system must be reformed to deepen democracy and slash abuses that have ruined the nation, leading to a debt mountain of gargantuan  proportions.

All these sweeteners to the long suffering Greeks come at a cost, so how can Syriza find the money to implement them. The answer is simple – Syriza argues all its plans have been fully costed at a total of €11.3bn and will be paid for by several initiatives, including a crackdown on tax evasion, corruption in government tenders and smuggling. The election of a far left party has woken up fears that it will lean to Russia for support. 

It did not go unnoticed that the first foreign ambassador whom Alexis Tsipras met as prime minister was Russia’s envoy. It is a fact that he was once considered a pro-Moscow communist and visited Russia last May when he strongly criticised EU sanctions imposed on Russia for its annexation of Crimea and its involvement in eastern Ukraine.

Greece complained that it had not been consulted about a strongly-worded joint statement by EU leaders on the escalating violence in Ukraine and the threat of further sanctions. Yet not unsurprisingly Tsipras ruled out seeking aid from Russia and preferred to pursue a new debt agreement with European partners, taking a milder line after a tough first round of negotiations with Angela Merkel proved futile.

Quoting German Finance Minister Wolfgang Schauble at a G20 meeting in Istanbul, he said “Greece’s creditors can’t negotiate about something new”. To this the Greeks replied by asking  Germany to repay a loan that the Nazis forced the Bank of Greece to pay during the occupation. That would work out at an estimated €11bn today. Enter in the scene a pugnacious finance minister, Yanis Varoufakis who last month started touring European capitals in a diplomatic offensive to replace Greece’s bailout accord with the “troika”. The reception he met in London was lukewarm, with David Cameron conspicuously failing to congratulate Alexis Tsipras on his election.

The British are becoming ever more sceptic of the euro experiment and Downing Street is concerned that Tsipras could become a rallying figure for opposition to the economic reforms that Greece was subjected to in order to reform its weak financial controls. It is rumored that Cameron and Angela Merkel fear that France, Italy and other south European countries will use the Greek result as an argument to relax austerity spending rules, tipping the fragile global economy into recession.

So what are the Greeks aiming to get as a concession? One version of the Syriza’s plan suggests that 30% of the old bailout programme should be disbanded, although they argue that this percentage is negotiable. Certainly Greeks are adamant that a series of new reforms should be introduced to replace unpopular medicine prescribed by the German paymasters as part of the bailout agreement.

To conclude it is yet to decide whether the promised pot of gold is to be or not to be. Many feel that the recent history of the European Union suggests that compromise is still on the cards. Greece is on tenterhooks suffering from an acute cash flow deficiency as it eagerly waits approval of the next tranche of cash from the Troika.

Will it be an eleventh hour surprise as if there is no deal the money will run out? For the people of Athens who in ancient times enriched the world with their superior legacy of philosophy, there is a clear and present danger of failure, with consequences impossible to predict.