Greece’s Stumbling Troika Steps

Greek officials rounded on the EU-ECB-IMF troika after they asserted that deficit reduction was short of “critical mass” and an enhanced EUR 50 billion privatization thrust was among other progress still outstanding. The international representatives recommended release of the next EUR 15 billion joint installment nonetheless, citing the 2010 budget gap improvement to under 10 percent of GDP on “impressive” wage and pension changes. The next phase of the economic recovery plan, involving better collection, deregulating “closed” professions, and placing state-owned banks on sounder footing will be more “socially difficult,” they warned as evidenced by continuing worker strikes greeting their visit. About one-fifth of central bank liquidity support has gone to Greek banks, which have struggled to raise fresh capital and taken heavy losses the past year as output shrank almost 5 percent for the worst performance in decades. 2011’s formal government prediction is for another 3 percent decline with credit also wavering. The five-year divestiture schedule may barely dent the overall 140 percent of GDP debt level and action has already been compromised by ruling Socialist party faction opposition to “family silver” property disposals. Unemployment is at 14 percent, and Prime Minister Papandreou’s approval rating is only 35 percent although the conservatives fare worse and 80 percent surveyed reject early elections. The revenue target lagged in January as the delegation arrived, and negative sentiment sent bond yields again to 12 percent, although foreign investors have returned to T-bill auctions and a specialized diaspora issue has been in Finance Ministry preparation for the coming months. As the end March date nears for a mooted “grand bargain” solution to the Eurozone debt crisis, several addition formulas for Greece have been proposed but yet to materialize. A simple extension of international assistance to match Ireland’s timetable has been rumored at one extreme, while a more elaborate alternative would presume a Stability Facility-backed buyback of existing obligations in exchange for new 30 year paper under a menu modeled after the 1990s developing country Brady plan.

While buyback discussions have been acknowledged, talk of haircuts or default remain taboo at least until EU policy implicitly posits such outcomes as heads of state gather to chart future design. Neighboring Portugal, widely pegged as the next emergency recipient, recently conducted a reverse auction to test the repurchase path but the result was lackluster as 10- year yields topped the critical 7 percent threshold. The economy shrank in the last quarter of 2010 as EUR 20 billion in gross issuance is scheduled this year, with the minority government austerity package under fire from no-confidence votes and labor protests in another dicey dance.