Strings Attached: Berlin Weighs New Aid Package for Greece
The Greek government is demanding more financial assistance in view of the initial reform progress it has made so far. But German Finance Minister Wolfgang Schäuble wants to remain firm. Athens must implement planned reforms before getting more aid.
No matter where Greek government representatives crop up these days, they spread a festive mood. Early last week, the European Union member's finance ministers, known as the Euro Group, detected a certain pride and self-confidence in their Greek counterpart. The country is on a steady road to recovery, Giannis Stournaras told the group.
For the first time in years, there are signs of economic recovery, with exports on the rise and a booming tourism industry, he said. But above all, public finances are recovering. With a touch of triumph in his voice, Stournaras reported he had achieved a budget surplus of around 1 billion ($1.35 billion) last year -- at least when interest payments are left out. But then the inevitable came: Greece had delivered, Stournaras said, and now it was time for its partner countries to make new funds available to the country.
Thus, pride met prejudice. In no other ailing European nation are self-image and public perception further apart than in Greece. Stournaras and his Prime Minister Antonis Samaras see their country as being on a par with the successful models of Ireland and Spain when it comes to reforms. Europe's finance ministers, on the other hand, paint a very different picture: While Spain and Ireland no longer depend on the assistance of European bailouts, it is exactly the opposite for the Greeks.
Greece thinks its success so far -- even though it lags far behind requirements -- warrants further aid. The finance ministers are reluctant to provide it. They found the progress pleasing, but they all agreed with the judgment made by their chairman. "It's taking too long," said Dutch Finance Minister Jeroen Dijsselbloem.
While the country's austerity measures are worthy of praise, the Euro Group told Stournaras, it wanted to wait for official data from Eurostat. This will be available in late April, and until then Athens has some homework to do.
Schäuble Wants Quick Decision
Representatives of the troika, comprised of the European Commission, European Central Bank and International Monetary Fund, were particularly critical of Greece. They accused Stournaras of following through on less than 50 percent of the promised reforms.
European officials are now searching for a new strategy for handling their biggest problem case, and it appears that German Finance Minister Wolfgang Schäuble is pushing for a swift solution. In a five-page internal memorandum to his ministry, entitled "Greece Position Paper," the strategy of both supporting and making demands has been given new content: Greece can only hope for new aid from its creditors if the government is prepared to make further reforms. According to the unsparing list made by Schäuble's officials, the bankrupt state's deficiencies are numerous, including the issue of fundamental problems in public administration that remain to be remedied. Tax authorities are unreliable, the creation of a nationwide land registry has stalled, and privatization isn't moving ahead. The job market has also failed to become as flexible as desired. In short, the reforms undertaken by Greece aren't enough.
Not to mention, Athens has to raise more than 2 billion this year to meet the budget requirements of its second bailout package -- and it's nowhere close. With the promised steps still yet to be taken, the other euro zone countries are refusing to pay out two tranches of the bailout package, worth 8.3 billion altogether.
The Greeks need money at the latest by May, when payment obligations of some 10 billion are due. That's why Schäuble and his crew hope that cash-strapped Athens will hurry to catch up. It's also why he's building a threat scenario along with his European counterparts -- that the outstanding money will only be paid with further Greek reform.
Whether this carrot and stick approach will work is questionable, however. Schäuble knows the Greeks are aware that donor countries can hardly afford to deny the tranche payments. If Greece defaulted, the euro crisis could quickly resurface. Thus the Euro Group wants to be accommodating -- only not just yet. "The worst thing would be for the Greeks to rest on their successes while reform fatigue revives," says a senior German official. In fact, Schäuble is ready to make even broader concessions. According to the position paper from his ministry, he is bracing himself for a third bailout package.
Debt Ratio Still at 176 Percent
Until now he hadn't ruled out a further program for Greece but had always said a decision on this would only be due by the end of the year. But now he appears resigned to providing more aid -- and it's to be offered to the Greeks in a few weeks.
Greece's debt burden is so great that it still can't service it via the financial markets. Even though private sector creditors have already waived a large part of their claims, the debt ratio -- meaning total liabilities as a proportion of gross domestic product -- stands at 176 percent, or 322 billion in absolute figures.
Now Schäuble is pushing for action. The paper mentions another debt haircut which this time would mainly hit public creditors. Another possibility cited is a so-called limited follow-on program -- meaning new financial assistance provided by Greece's partner countries. The funds could come from the European Stability Mechanism bailout fund which still has ample reserves. The International Monetary Fund doesn't want to take part in any further assistance.
The measures could be complemented with a further source of money, Schäuble's officials propose. The Greek government could try to borrow limited sums of money from financial markets. That no longer seems impossible. The interest rates on Greek government bonds have fallen significantly in recent years because the perceived risk of default has declined. The Greek government could afford to service the new debt.
But the yields remain far above the European average. Some investors may be ready to buy new Greek government paper. At the same time private creditors don't need to fear that their papers will immediately be devalued. A repeat of the 2012 debt haircut for private creditors would destroy all remaining faith in Greece's government finances and in Europe's bailout policies. That's why it won't happen.
Fears of Reducing Pressure on Greece
Schäuble's officials have warned against awakening hopes of a broad new package because this could prove "counter-productive." A prematurely announced decision could take the pressure off Greece to carry on with its reforms. But there shouldn't be too much delay either, the officials add. They say the Germans and their European partners should signal their readiness before the European elections in May to provide Greece with further assistance attached to clear conditions.
That would boost support for Europe in Greece. The new package could have a volume of 10 billion to 20 billion, according to sources in the Finance Ministry in Berlin. But the German government doesn't' want to confine its help just to money. It plans a new program to bring the Greek government and administrative apparatus up to 21st century standards. All ministries will be involved.
The German Labor Ministry has been asked to make suggestions for improving job training in Greece. The Finance Ministry wants to help improve the organization of the tax-collecting system. There have been similar attempts before but the Germans want to try it again, not least as a sign of good will. The Foreign Ministry will collect proposals in the coming weeks. Other donor states could join the project, according to the German plans.
The Cyprus Model
Berlin also wants to urge Greece to ask the World Bank and the European Bank for Reconstruction and Development for help. Both of those institutions are well versed in helping to revive economies in dire straits. Cyprus sought their help and was now benefiting from it, German officials argue.
In fact, Berlin is proud of the Cyprus rescue. Schäuble and his aides feel vindicated in their crisis management for the troubled island nation last year. They see Cyprus as a model for future bailouts: tough action at the beginning followed by patience.
"We turned the Cypriot business model on its head, wound down banks and involved private creditors," says one Schäuble aide. Now, just a few months later, the policy is bearing fruit. No one is talking about Cyprus as a crisis region. The country, the aide says, is making progress in all areas. In Greece's case, the international community initially shunned tough measures, and kept having to adjust the aid arrangements without having achieved a breakthrough so far.
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