Finance & economics | Debt and austerity in Greece

Smoking out the firebrands

Can Greece’s new government satisfy voters and compromise with its creditors?

|Athens

ALEXIS TSIPRAS and his radical left Syriza party worked for more than a year while in opposition to prepare their policy platform. Over 80 committees were charged with producing specific proposals for overhauling different sectors of the Greek economy. Planning for power is one thing; exercising it quite another, especially when a country is in a hole as deep as Greece’s.

Syriza’s programme, if fully implemented, will result in a sharp fall in revenues and a large increase in social spending. Yet many Greeks stopped paying taxes before last month’s elections, anticipating cuts and forbearance. Government revenues fell by more than 20% in January on an annual basis; the 2015 budget is now likely to be derailed by the end of March, says a former finance minister.

None of which plays well with Greece’s creditors, whose €245 billion ($277 billion) bail-out envisages austerity and reform, not splurges and backtracking. Wolfgang Schäuble, Germany’s finance minister, said on February 10th that if Greece did not seek an extension of its bail-out, which expires on February 28th, “Then it’s over.” A meeting on February 11th, at which Greece presented its plans to euro-zone finance ministers, ended in disarray, without even the usual statement about fruitful discussions. On February 12th Mr Tsipras, now prime minister, will meet Angela Merkel, Germany’s chancellor, in what promised to be another fraught exchange. Unless some sort of agreement is found soon, another Greek default looms when IMF debts mature in March.

At its root, the problem is simple: Greece does not have enough income to pay its bills. Since the financial crisis began, its economy has shrunk by more than any other rich country’s. Between 2008 and 2014 nominal GDP, a rough proxy for an economy’s capacity to repay debts, fell by 22%, much more than any other European invalid. The pain at an individual level has been just as sharp. House prices are down by around 40% since 2008. Median incomes fell by 22% between 2008 and 2013; for 18- to 24-year-old Greeks they were down by 38%. The economic collapse is comparable to one on the other side of the Mediterranean, in war-torn Libya.

The bail-outs Greece received in 2010 and 2012 shifted its debts to new creditors but, despite losses imposed on some private-sector lenders, did little to lower them. At the end of 2009 Greece owed €301 billion, then around 127% of GDP, mainly to the private sector. Today it owes around €315 billion (175% of GDP), all but €70 billion of which comes from public lenders. The country’s new creditors are the IMF (€25 billion), the ECB (€27 billion) and European governments (€195 billion).

Greece’s new creditors are both generous and demanding. The country’s interest rates have been slashed: its total interest payments in 2014 were just 2.6% of GDP, according to Zsolt Darvas of Bruegel, a think-tank. That is lower than several less indebted European countries (see chart).

But the money comes with conditions aimed at stabilising Greece’s finances. These include cuts to Greece’s minimum wage and pensions, lay-offs of civil servants and the privatisation of various assets, including ports and state-owned buildings. Creditors like Mr Schäuble hope the package will make Greece more competitive and thus spur economic growth, as well as generating a budget surplus to be used to pay down debt. The bail-out plan foresees Greek debt falling to 120% of GDP by 2020.

The crunch has come because Greece wants to keep the low rates but not the conditions. Nadia Valavani, a deputy finance minister, plans to scrap a hated property tax, enfia, a popular move that will cost the state €2 billion in revenues. Ms Valavani also says a tax on businesses offering services to tourists will stay at 13% and not be hiked to the standard 23% as planned. The Aegean islands, Greece’s most prosperous region, will continue to enjoy lower rates of value-added tax than the rest of the country. The threshold at which income tax bites will be restored this year to €12,000, leaving around 3m low-income Greeks paying no tax. The privatisation programme, due to raise a total of €25 billion, including €3.5 billion this year, has been halted. Altogether these giveaways could cost around €8 billion.

To balance the books Mr Tsipras is pinning his hopes, optimistically, on a tax crackdown. Smuggling cigarettes and fuel costs the government around €1.5 billion a year. Tax-dodging tycoons could furnish some extra income too. Panayotis Nikoloudis, a former anti-money-laundering tsar who heads a new anti-corruption ministry, says there are 3,500 cases of large-scale tax evasion amounting to €7 billion; they could yield €2.5 billion in 2015. But in the unlikely event that all this money were collected, Greece would still be €4 billion short.

Greece's agony explained in charts

Many governments’ plans do not add up, of course, and Mr Tsipras has already signalled a willingness to compromise. On February 9th he outlined a four-part plan. First, Greece would keep “70%” of previously agreed reforms; those ditched would be replaced by ten new measures agreed with the OECD, rather than the despised “troika” of the ECB, the IMF and European Commission. Second, it would reduce its primary (ie, excluding interest payments) budget surplus to 1.5% of GDP, from a target of 3% this year and 4.5% in 2016. Third, it would swap much of its existing debt for two exotic types of bond: a “perpetual”, meaning that the principal would never be repaid, and a “GDP-linked” bond, with payments tied to the health of Greece’s economy. Finally, the government would spend an extra €1.9 billion on “humanitarian assistance” for struggling Greeks.

Greece’s creditors can give some ground. Despite the low interest rates the country is being charged, the loans are profitable, since most European governments can borrow at even lower rates. Cutting them to a profit-neutral level and further extending the duration of Greece’s debts could generate savings worth 17% of GDP, according to Mr Darvas. In the spirit of not profiting from Greece’s depression, euro-zone officials could also release €1.9 billion in profits from an earlier ECB bond-buying programme.

Explore our interactive guide to Europe's troubled economies

But Greece’s government will have to offer much more in return, and Mr Tsipras will have two constituencies in mind if he reverses course. One is the extreme left of Syriza. On privatisation, for example, both the finance minister, Yanis Varoufakis, and the development minister, George Stathakis, have voiced support for completing the sale of the state’s 67% stake in Piraeus Port Authority. China’s Cosco, which already runs a profitable container terminal at the port, and Denmark’s Maersk were frontrunners among the shortlisted bidders. But one of the left’s stalwarts, Theodore Dritsas, is shipping minister and has vowed to block the deal. Panayotis Lafazanis, who heads a new ministry for “productive reconstruction”, environment and energy, has blocked two other deals aimed at bringing Greece fully in line with EU energy directives.

The other group Mr Tsipras will have to keep happy is an electorate buoyed by the government’s feisty dealings with the rest of Europe. “Whatever happens next, Syriza has given us back our dignity,” said Roula Zlatani, a 68-year-old Athenian pensioner. “The government’s finally standing up to the foreign powers that have made our lives so difficult.”

This article appeared in the Finance & economics section of the print edition under the headline "Smoking out the firebrands"

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