Debt crisis: How Greece's euro tragedy turned into a farce at the end

The Greek Tragedy which was expected to lead to a Grexit, has gotten diluted to a Greek farce looked at either which way. The third bailout package which can now be called the BP-3 (just like the QE-1, 2, and 3 of the Federal Reserve) superseding the other two worth €240 billion for €86 over three years, can have two outcomes. The first is that the Greek Parliament rejects it in which case the exercise of working overnight becomes futile. The other is that it is accepted, in which case the question can be asked as to why did Greek Prime Minister Alexis Tsipras create a commotion with the default to the IMF and then the Referendum which said ‘no’ to austerity, has now agreed to something he could have done earlier. The fact is the citizens have faced hardship of not having money and the banks have gone broke with no money to disburse and the seriousness could be felt when Greek credit cards were not accepted for payments online as there was no money in the country! [caption id=“attachment_2318304” align=“alignleft” width=“380”]  Greece’s euro crisis. Reuters[/caption] It will be another two days when the final result will be known. The European Commission has said that ‘no one won or lost’ but it was tough finding the right balance. Both won, because Greece continues to get the money which they want which includes a €35 billion growth package. But the Euro nations can be happy that they have gotten Greece to agree to their austerity programme (provided it is ratified by Parliament). But such an agreement could have been agreed to even before 30 June which would have spared both sides the agony of such embarrassment. What does the deal involve? First, there would be €86 billion provided over a period of three years to Greece. This would be useful for the country which requires funding for growth. Second, there has to be sequestering of government assets, which would mean in plain language some kind of privatization where the government lets go of ownership of enterprises it owns today. This act is to bring in around €50 billion which will be split into two parts. Around half would go for recapitalizing Greek banks, whose capital adequacy ratios have fallen below the prudential limits. But Greece can have this escrow maintained in Athens and not Luxembourg as was desired by the European Commission. Third, there would be no debt write-off for Greece, and hence the debt of €330 billion would have to be on their books. However, the term of debt would be restructured appropriately so that the country could service it without going through much pain. Fourth, a critical decision on providing a bridge loan is to be taken to ensure that they are able to tide over liquidity requirements in the short run. Presently there are capital controls and no one can withdraw more than €60 a day as there is shortage of euros. These loans will be necessary to maintain solvency in the country and enable banks to function in a normal manner. What has Greece to give in return? The austerity programme which was opposed by the Syriza party has to be implemented ultimately and there is really no escape from it. First, government expenditure has to be kept down, which means austerity which Tsipras has been opposing all the time. Second, there has to be reconsideration of the pensions that are being paid by the government which can mean longer working years for the staff. Third, VAT has to be reviewed and goods tax has to be increased to garner more revenue with the rates being increases. Fourth, related to taxation the tax base has to be widened so that there is inherent buoyancy in the collections. Fifth, they have to meet the bank recovery norms that have been agreed upon and last, and quite interestingly, it has been argued that the statistics department should have autonomy in its functioning and not be influenced by government pressures. This is important because the genesis of the Greek crisis was in the mis-reporting of economic numbers all through by the government. On the face of it, none of the reforms are really ‘humiliating’ as stated by some of the Greek officials. Cutting expenditure to prudential levels which includes curbs on pensions is standard fare for countries which under fiscal stress. And moving out on one’s own would not really mean doing otherwise, because even with a drachma, the country would not be able to print more notes to finance expenditure because in the absence of possession of hard currency it would be impossible to support consumption demand. Therefore, on the whole Greece could be getting a better deal than they would have had with an exit. The deliberations leading to this compromise by the European Council have tried their best to keep Greece within the fold and retain the integrity of the euro currency. While Germany has had to compromise a lot on its principles the overriding commitment to the euro had prevailed. It is now really left to Parliament to ratify it along with those of the other euro nations- the latter may not be a problem as this was already something that they were willing provided the conditions were met. The ball is back to Greece which after the default and referendum has to take the final call and hopefully they would agree and free themselves of the pain of starting afresh. This could mean another elections as Tsipras would have to convince all those who voted against austerity that at the end of the day they cannot spend beyond their means. That in short is the message. The author is chief economist at CARE ratings. His views are personal.