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The translated Troika

Posted by Joseph Cotterill on Oct 11 14:33.

11 October 2011 – Statement by the European Commission, the ECB and IMF on the Fifth Review Mission to Greece

Staff teams from the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) have concluded their fifth review mission to Greece to discuss recent economic developments. The mission has reached staff-level agreement with the authorities on the economic and financial policies needed to bring the government’s economic program back on track.

Translation: Let’s not mention how long these talks took, shall we?

Regarding the outlook, the recession will be deeper than was anticipated in June and a recovery is now expected only from 2013 onwards. There is no evidence yet of improvement in investor sentiment and the related increase in investments, in part because the reform momentum has not gained the critical mass necessary to begin transforming the investment climate. However, exports are rebounding—albeit from a low base—and a shift towards a more dynamic export sector, supported by a moderation of unit labor costs, should lead to more balanced and sustainable growth over the medium term. Inflation has come down over the last year and is expected to remain below the euro area average in the period ahead.

Translation: We have gotten our sums wrong. Greece will spend half a decade in recession before it starts growing again, a year longer than we believed just months ago. But look! Inflation is down! Good news, right? Right?

In the fiscal area, the government has achieved a major reduction in the deficit since the start of the program despite a deep recession. However, the achievement of the fiscal target for 2011 is no longer within reach, partly because of a further drop in GDP, but also because of slippages in the implementation of some of the agreed measures.

Translation: Greece has failed to control its deficit. This year is a write-off and we’re not even past Halloween yet. In fact, the deficit cratered because of a double whammy. Greece is not getting enough taxes because the recession (you know… the one we now think will go on even longer) is making everyone broke. Greece is also not doing enough to collect taxes or control spending anyway.

As for 2012, the mission believes that the additional measures announced by the government, in combination with a determined implementation of the adjusted Medium-Term Fiscal Strategy, should be sufficient to bring the fiscal program back on track and ensure that the deficit target of EUR 14.9 billion will be met.

Translation: Ever heard the one about defining insanity as doing the same thing over and over and expecting a different outcome? We haven’t.

Looking to 2013-14, additional measures are likely to be needed to meet program targets. Such measures should be adopted in the context of an update of the Medium-Term Fiscal Strategy by mid-2012. To ensure that the program is growth-friendly, and in view of the ambitious assumptions regarding improvement in revenue administration already embedded in the Medium-Term Fiscal Strategy, it is essential that such measures focus on the expenditure side.

Translation: We are going to make Greece vote through another austerity programme. We will not mention the risks of social unrest associated with this proposal. We have screwed up so badly on getting Greece to collect taxes, we’re going to abandon telling them to do any more of that, beyond praying the current plan will work. We will however tell Greece to cut spending even more.

In the area of privatisation, progress has been achieved with the creation of a professionally managed privatisation fund. However, delays in the preparation of the assets for privatisation, and to some extent worse market conditions, mean that revenues in 2011 will be significantly lower than expected. The government remains, however, committed to the revenue target of EUR 35 billion by the end of 2014. Ensuring that the privatisation fund remains independent from political pressures remains key for success in this area.

Translation: Greece has failed to sell enough stuff. Everyone got their sums wrong on this. Despite its abject failure this year, we will still believe Greece when it says it can meet the original target within three years. As to why it’s all gone so wrong here, once again, we have faced a double whammy of Greece not doing enough and no one really wanting to buy the assets off them. Local politicians are starting to make noises about the Greek nation being put up for sale, so we need them to shut up to stop the wheels coming off the whole thing.

Banks have improved their capital base through market-based means. As evident from this weekend’s resolution of Proton Bank, the recent amendment of the banking law ensures that non-viable banks can be wound down while protecting depositors’ interest and preserving the stability of the financial system.

Translation: We are going to claim that the recent failure of a small bank is in fact a big success story. At least Greece has shown it can act quickly to rescue depositors in this case and its brand-new bank restructuring law works well. We will completely ignore the important development that Greek banks increasingly receive funding from an emergency liquidity run by the Bank of Greece, rather than from normal collateral operations at the ECB. This is because they are running out of collateral.

As to structural reforms, areas of progress include the transport sector, licensing procedures, and regulated professions. As overall progress has been uneven, a reinvigoration of reforms remains the overarching challenge facing the authorities. In this regard, the decision to suspend the mandatory extension of sector-level collective agreements to the firm level is a major step forward, as it will help ensure the flexibility in the labour market needed to boost growth and prevent high unemployment from getting entrenched.

Translation: We blame a lack of willpower on the part of Greece for failing to ramrod through massive structural change overnight. We’re faced with a really mixed bag here, though if Greece carries on kicking the trade unions, we might get more people into jobs.

Overall, the authorities continue to make important progress, notably with regard to fiscal consolidation. To ensure a further reduction in the deficit in a socially acceptable manner and to set the stage for a recovery to take hold, it is essential that the authorities put more emphasis on structural reforms in the public sector and the economy more broadly.

Translation: Greece is not going as fast as we’d like. But even we’re worried now about riots on the streets and the gouging effects of the recession. The recession which will go on even longer (see previous point on our new estimations).

The success of the program continues to depend on mobilizing adequate financing from private sector involvement (PSI) and the official sector. Ongoing discussions on PSI together with assurances provided by European leaders at their July 21 summit suggest that the program remains fully financed.

Translation: We don’t know if we can shake enough money out of bondholders to keep this show on the road, but we think events now “suggest” this. Whether and how bondholders get involved is still completely up in the air and we still need to finish talking to them. We need the bondholders to cover an official financing gap. We can’t say very much about how the current bond swap is going. At this point we’re still relying on the promises of politicians at a summit three months ago.

Once the Eurogroup and the IMF’s Executive Board have approved the conclusions of the fifth review, the next tranche of EUR 8 billion (EUR 5.8 billion by the euro area Member States, and EUR 2.2 billion by the IMF) will become available, most likely, in early November.

Translation: We still can’t confirm when or actually if (do note the strategic use of commas around “most likely” – Ed.) Greece will get more cash. Maybe early next month if no one throws their toys out of the pram. Tune in next time — , same place, same failure, same old jargon covering it up!

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