No 1394 Posted by fw, July 10, 2015
“Close confidant of Yanis Varoufakis and Greek government advisor, Jamie Galbraith, confirmed that Tsipras never intended to win the referendum. He essentially confirms the report by Ambrose Evans-Pritchard that many readers rejected, that the referendum was a ploy to save Tsipras’ and Syriza’s face in admitting defeat and allowing a new coalition or a new government to cut a deal with the creditors…. And that means that Germany will be able keep pursuing policies that are destined to destroy the Eurozone even longer: running large trade surpluses, refusing to finance its trade partners, and bucking all measures to move to meaningful Federal fiscal spending that might buffer national differences in performance and stealthily recycle some of the German trade surpluses. The end result will be more oppression, more suffering, and a more catastrophic eventual Eurozone breakup.” —Yves Smith, Naked Capitalism
To read Smith’s complete analysis of Tsipras’ betrayal of Greeks who voted no in the phony referendum, and a copy of the full text of the final proposal submitted to creditors, click on the following linked title. Alternatively, below is a slightly edited version of article along with the full text of the proposal submitted to creditors. To facilitate browsing, the reposted article features added text highlights of the main idea of most paragraphs.
This post’s headline comes from an assessment by the Australian website MacroBusiness of the proposal that Greece submitted to its creditors in the wee hours of the morning in Europe. Greece has capitulated, offering to implement more stringent austerity terms than those rejected by voters last weekend by a resounding margin in the Greek referendum. We are posting the full text of the Greek proposal at the end of this post.
As MacroBusiness sums up:
This is basically the same proposal as that was just rejected by the Greek people in the referendum…This makes absolutely no sense. The Tsipras Government has just:
If this deal gets through the Greek Parliament…then Greece has just destroyed itself to no purpose.
The proposal is indeed worse than the one rejected in the referendum last Sunday. From Kevin Drum, who links to the Washington Post (emphasis his):
Last Sunday the Greek population overwhelmingly rejected the European plan 61-38 percent.
So how did that work out for Greece? Not so well:
Under a 10-page blueprint [appended at the bottom of this post] completed late Thursday, the country said it would undertake austerity measures worth between 12 billion and 13 billion euros ($13 billion to $14 billion), including raising taxes on cafes, bars and restaurants.
The amount is significantly higher than the package of cuts that Greek voters rejected in a hastily called referendum on the bailout Sunday. But nearly two weeks of a banking shutdown that has brought the economy to a virtual standstill have left this Mediterranean nation with few other options to avoid sliding into bankruptcy.
The Greek blueprint for pension cuts and VAT increases is essentially copied word-for-word from the June 24 European proposal. There may still be sticking points elsewhere (I haven’t done an exhaustive line-by-line comparison of the two documents), but VAT and pensions were always the key areas of difference. Combine those concessions with the higher deficit target in the new blueprint and Greece hasn’t just caved in to the Europeans, it’s all but prostrated itself and begged not to be kicked out of the eurozone.
Or so it seems. There’s always the possibility of gotchas hidden away in a stray word or two. But at a first glance, it looks like total capitulation. Two weeks of bank closings and import stoppages has given the Greeks a vivid taste of what life would be like if Europe forced it to abandon the euro—as it seemed they were all too willing to do—and that short taste was quite enough, thank you very much. Viewed through that lens, apparently another few years of German-enforced austerity didn’t look so bad after all.
The proposal does not include debt relief. [Proposal appended at the bottom of this post].
[Peter] Spiegel tweet — I see no mention of debt relief. Acknowledgement that comes later? — Peter Spiegel (@SpiegelPeter) July 9, 2015 based on having copies of all three documents submitted by the Greek government to the creditors: “First, none of the documents mentions debt relief.”
Ironically, the proposal still shields the military. It calls for €100 million in cuts this year and €200 million for 2016. These are cuts versus budget, so the total cut on an ongoing basis is €200 million. The creditors had called for €400 million. Note also that the story that claimed that the IMF rejected cuts appears to be false. Not only was it denied by the IMF, but we are told by a reliable source that a US official in a position to get an answer from the IMF asked about the press story saying that the IMF objected to cuts said that the IMF had in fact pushed for the Greek government to make cuts to military spending and they were opposed.
Close confidant of Yanis Varoufakis and Greek government advisor, Jamie Galbraith, confirmed that Tsipras never intended to win the referendum. He essentially confirms the report by Ambrose Evans-Pritchard that many readers rejected, that the referendum was a ploy to save Tsipras’ and Syriza’s face in admitting defeat and allowing a new coalition or a new government to cut a deal with the creditors. From the INET interview with Lynn Parramore:
The recent Ambrose Evans Pritchard piece is very much on the mark (“Europe is blowing itself apart over Greece – and nobody seems able to stop it”). The Greek government, and particularly the circle around Alexis, were worn down by this process. They saw that the other side does, in fact, have the power to destroy the Greek economy and the Greek society — which it is doing — in a very brutal, very sadistic way, because the burden falls particularly heavily on pensions. They were in some respects expecting that the yes would prevail, and even to some degree thinking that that was the best way to get out of this. The voters would speak and they would acquiesce. They would leave office and there would be a general election.
The government officials working on a deal appear, by accident or design, to have sent a version of the proposal to Parliament that includes debt relief when the version sent to the creditors does not. There were a couple of junctures at which the Greek team sent Brussels the wrong version of their proposal. But the European Commission and French have come to “help” the Greeks. One suspects that they’ve essentially take over the drafting process despite claims otherwise. It’s not clear how the creditors would be sent a “wrong” version (which would be fatal) or Parliament (which could be read as bad faith). There is a parliamentary vote at 2:00 PM in Athens; that is presumably more than ample time to get this sorted out, but it’s not a good sign.
Even with the Greek government having conceded, it may not be possible to get to a deal. The time is astonishingly tight, and a 13 page memorandum falls short of the level of detail usually required for programs of this sort. Incredible as it might seem to readers, developing countries, which represent about half the votes on the IMF board, are already up in arms that Greece has gotten attention and been given breaks that no other country has gotten from the IMF.
Normally, one would think it would be possible to let the hashing out of fine points go on another day or two (or five), but the asphyxiation of the Greek banking system makes that impossible. Even if a deal is agreed on Sunday, the banks are in such desperate shape and so drained of cash that it’s not clear how long it will take them to get back to a semblance of normal operations. We’ve pointed out repeatedly that mere twelve day bank holiday in Cyprus, which has a healthy economy before the banking crisis started and banks that had not been subject to a six month long slow-motion bank run before its ECB-induced crisis. It took two years for Cyprus to remove capital controls. Even if the ECB turns liquidity back on this Monday, the banks will remain walking wounded for a very long time. And many import-related businesses may be too badly damaged to survive. From the Financial Times: [Subscription required or pay per view]
Greek lenders face bankruptcy on Monday if the country fails to strike a deal with creditors over the weekend, according to senior bank executives, as they described frantic efforts to keep the country’s financial system afloat and their preparations for an uncertain future….
As the pressure has mounted in recent days, bankers told the Financial Times that Greece’s banks were effectively passing cash among themselves. The system is coordinated by the Bank of Greece, which has been asking healthier banks to return some of their liquidity so it can be doled out to weaker ones…
The banks are pinning their hopes on an eleventh hour deal between Greece and the eurozone that would allow the ECB to increase the €89bn in emergency funding that they have already drawn and also ease their borrowing terms.
Last week the ECB changed the rules so Greek banks were obligated to provide more collateral for every euro they borrowed from the ECB. The changes mainly affected collateral that was secured by a Greek government guarantee. One banker estimated about €16bn of collateral was “wiped out” by the ECB’s move. If an increase is not secured, the banks “will be put under resolution and shut down”, one banker said.
In other words, if the ECB does not turn the money spigot back on this Monday, it may be impossible to avert a Grexit. One stopgap would be for the Eurozone countries to guarantee an increase in the ELA. A similar step was taken in 2012 when loans by the central bank to Greece were guaranteed while the country was technically in default. That approach thus has the advantage of having a precedent. But Bloomberg reported earlier this week that, “No concrete proposals are yet under discussion.”
And it’s not clear how banks would be resolved. We’ve pointed out that the only information we can find on Greece’s deposit guarantee fund is as of 2013, and it show it has only €3 billion. It’s unlikely to have risen since then, given how draconian austerity has been in Greece. That’s hardly enough to even begin to protect depositors in the case of bank failures. But where does the money come from when the government is bankrupt? Again from the Financial Times: [ibid]
In a resolution scenario, the first step would be to wipe out some or all of the equity owned by shareholders and those who hold junior bonds and other low quality capital. Such actions could raise €30bn in tota….Greek banks hold about €40bn of loan loss provisions, covering almost 60 per cent of non-performing loans, say financiers.
If they cannot generate sufficient capital this way, bank executives say, they may be forced to “haircut” depositors. This could mirror events in Cyprus two years ago, when the government seized a portion of deposits above the €100,000 threshold covered by deposit insurance rules in order to recapitalize banks.
But some argue such a move would have limited effect: only about €30bn of Greek banks’ €120bn deposit base is outside the guarantee. Of that sum, about €20bn is the working capital of small businesses, which would have particularly harsh repercussions for the economy if it were subjected to a so-called bail-in.
Greek bankers are conflicted on the prospect of imposing losses on deposits below €100,000 and European regulatory sources say it is legally forbidden.
Shorter: many of the small business that haven’t been already pushed to or over the brink of failure by the bank holiday and capital controls would be via a bank resolution. And small businesses are even more important as employers in Greece than in the US.
Scarcities, particularly of drugs, and economic distress have intensified greatly this week. We warned that the damage done by a bank holiday would accelerate rapidly, and that is happening. While the plural of anecdote is not data, and both this Wall Street Journal story and Financial Times reporter Peter Spiegel’s Twitter survey are subject to considerable sample bias, both suggest that many “Oxi” voters of last weekend have reversed themselves as they’ve gotten a clearer picture of how destructive a Grexit could be. Moreover, in fairness to them, recall that they were given false assurances by Syriza leaders. Varoufakis insisted that banks would reopen last Tuesday no matter what, and that Greece has four months of pharmaceutical supplies. Tsipras assured voters that with a fresh mandate, he would get a better deal from the creditors. Party officials vociferously denied the assertion by European leaders meant a vote against the Eurozone and would be taken as a vote for a Grexit.
The Greek government faces a legitimacy crisis. Given the overwhelming Oxi vote, how can Tsipras sign up for a deal that is even worse? There is a real possibility that young people, particularly in Athens, which has the highest population density of any city outside of Asia, will take to the streets.
And even if there is no outburst of protests, how can any government that signs a creditor-acceptable memo be seen as anything other than a Vichy state? Politico points out that Tsipras is likely to fracture Syriza with the proposal and will need to enlist other parties who supported a “Yes” vote to get the parliamentary approval he needs. That should hardly be a surprise to Naked Capitalism readers; we pointed out the disconcerting move the morning after the referendum, in which Tsipras met with leaders of all the parties outside the government save Golden Dawn and asked for their support, and all agreed save the communist party KKE. Did FDR seek the support of the defeated Republicans in 1933? I struggle to think of a similar move (beyond a mere polite gesture) after a landslide win.
It may be too late to reach an agreement even with the Greek capitulation. Despite the strong incentives to salvage Greece and avoid the unknown of a Grexit, distrust on the creditor side is high. Three days is perilous little time to persuade parties that have seen Greek officials repeatedly say one thing to the press at the side of officials like Merkel and then partly or fully repudiate those statements, often with vitriol, back in Athens. From Politico:
In Germany, conservatives among Merkel’s Christian Democrats, including Wolfgang Schäuble, simply don’t believe Athens has the will to implement a new program of reforms.
“How confidence-building measures can materialize between now and midnight on Sunday strains my imagination,” the sharp-tongued German finance minister told a conference in Frankfurt on Thursday.
Schauble is critical to any deal getting done, but it’s not clear even if he were to get religion and start whipping hard for a Greek rescue that he could turn the sentiment of the German public and MPs around quickly enough. Similar acute skepticism exists in other hardline countries like the Netherlands and Finland.
Finally, before the MacroBusiness post which contains the full Greek proposal, a personal note. Many readers have been upset with our coverage to the point of taking out their anger against us in the comments section. They saw us as unfairly critical of the Greek government and by implication, too friendly to the Troika and Eurogroup.
In fact, we foresaw, correctly, virtually everything that has come to pass, including the deception of Syriza (see our post Tsipras’ Bailout Referendum Sham). And look at the comments section to see the hostility with which our assessment was received. And that is after not posting a large number of openly abusive comments.
We said from the outset that the Greek government would not succeed in its efforts to repudiate the memorandum unless it got meaningful help from outside parties, most important the US and the European left. Neither rode in to the rescue. The US had clearly thrown its weight in with the Troika as of February and the European left is still missing in action (sympathetic op-eds late in the game don’t cut it). The Left Platform correctly saw that Syriza’s Plan A was toast as of the Eurogroup memo.
Other countries, like France or Italy, are healthy enough and large enough to consider breaking from the Eurozone. It was never a realistic option for Greece, save at a devastating economic cost. Syriza standing up to the Troika was tantamount to sending graduate students against a Panzer division. The outcome was predictable.
In addition, virtually all economists irresponsibly underestimated the consequences of a Grexit. They’ve analogized it to a severe currency depreciation like the case of Argentina in the early 2000s, where the country bounced back relatively quickly after a plunge so serious that parts of the country saw considerable desperation-induced violence. Moreover, Greek citizens were never allowed to make informed choices. Tsipras kept saying a deal was around the corner and the two sides were not far apart. And even before the referendum, he and other Syriza officials vociferously denied that a Grexit would occur.
Even the Left Platform, which had the better diagnosis of the situation, merely advocated a Grexit as an alternative way to defy the Troika, and neither seriously considered what it would entail (a war level of preparation) nor built public support for the level of sacrifice involved.
The Greek government has submitted a plan to the creditors that is worse than if they had rolled over and accepted the memorandum when it came into office. In the meantime, its actions have been wildly at odds with its rhetoric of defiance. Varoufakis volunteered to continue to implement austerity in February, by volunteering to run primary surpluses “always”. In a deeply depressed economy, that will guarantee more contraction. And the ruling coalition stripped every official coffer it could find to continue to pay the creditors, including borrowing against pensions, which now that the government is utterly bereft of cash, was tantamount to raiding them. And it recklessly refused to consider, much the less prepare for, what might happen if the Troika refused to relent. And as soon as their poorly thought out plans started to go off the rails, they tried to escape their failed handiwork via a cynical referendum rather than take responsibility and assume the mantle of leadership.
Syriza has thus managed to deliver to the neoliberals a victory more complete than they could ever have engineered on their own. This has been the basis of our criticism, that Syriza by engaging in an open war against an opponent it could never hope to vanquish, was doing not just itself but also the Greek people and the left, lasting damage.
The Greek negotiations are now being steered in large measure by the French, who are conceivably next in line if there is a Grexit, given Marine Le Pen’s rising star. If Greece and the lenders manage to reach an agreement, it’s hard to think that Greek citizens will see the ruling coalition as anything other than a creditor puppet state. If the two sides can’t agree and Greece falls into a Grexit, the economic devastation will be so large as again to discourage any state save Italy and France, from pursuing a Eurozone exit, and even in those two countries, it is likely to give Euroskeptics considerable pause.
The net effect is to give Germany, its retrograde ordoliberals*, and its neoliberal allies freer rein to continue their destructive austerity policies. Despite how counterproductive austerity clearly is, Greece will be used as tangible proof that the cost of Euroexit is vastly higher. And that means that Germany will be able keep pursuing policies that are destined to destroy the Eurozone even longer: running large trade surpluses, refusing to finance its trade partners, and bucking all measures to move to meaningful Federal fiscal spending that might buffer national differences in performance and stealthily recycle some of the German trade surpluses. The end result will be more oppression, more suffering, and a more catastrophic eventual Eurozone breakup. (*ordoliberals promoted the concept of the social market economy that promotes a strong role for the state with respect to the market. This is in many ways different from the ideas that are nowadays connected with the term neoliberalism).
Greek chaos has reached a whole new level this morning with the release of its proposed compromises with the Eurozone. Here is the text in full:
Policy Commitments and Actions to be taken in consultation with EC/ECB/IMF staff:
Adopt effective as of July 1, 2015 a supplementary 2015 budget and a 2016–19 medium-term fiscal strategy, supported by a sizable and credible package of measures. The new fiscal path is premised on a primary surplus target of (1, 2, 3), and 3.5 percent of GDP in 2015, 2016, 2017 and 2018. The package includes VAT reforms (¶2), other tax policy measures (¶3), pension reforms (¶4), public administration reforms (¶5), reforms addressing shortfalls in tax collection enforcement (¶6), and other parametric measures as specified below.
Adopt legislation to reform the VAT system that will be effective as of July 1, 2015. The reform will target a net revenue gain of 1 percent of GDP on an annual basis from parametric changes. The new VAT system will: (i) unify the rates at a standard 23 percent rate, which will include restaurants and catering, and a reduced 13 percent rate for basic food, energy, hotels, and water (excluding sewage), and a super-reduced rate of 6 percent for pharmaceuticals, books, and theater; (ii) streamline exemptions to broaden the base and raise the tax on insurance; and (iii) Eliminate discounts on islands, starting with the islands with higher incomes and which are the most popular tourist destinations, except the most remote ones. This will be completed by end-2016, as appropriate and targeted fiscally neutral measures to compensate those inhabitants that are most in need are determined. The new VAT rates on hotels and islands will be implemented from October 2015.
The increase of the VAT rate described above may be reviewed at the end of 2016, provided that equivalent additional revenues are collected through measures taken against tax evasion and to improve collectability of VAT. Any decision to review and revise shall take place in consultation with the institutions.
Adopt legislation to:
By September 2015, (i) simplify the personal income tax credit schedule; (ii) re-design and integrate into the ITC the solidarity surcharge for income of 2016 to more effectively achieve progressivity in the income tax system; (iii) issue a circular on fines to ensure the comprehensive and consistent application of the TPC; (iv) and other remaining reforms as specified in ¶9 of the IMF Country Report No. 14/151.
On health care, effective as of July 1, 2015, (i) re-establish full INN prescription, without exceptions, (ii) reduce as a first step the price of all off-patent drugs to 50 percent and all generics to 32.5 percent of the patent price, by repealing the grandfathering clause for medicines already in the market in 2012, and (iii)) review and limit the prices of diagnostic tests to bring structural spending in line with claw back targets; and (iv) collect in the full the 2014 clawback for private clinics, diagnostics and pharmaceuticals, and extend their 2015 clawback ceilings to 2016.
Launch the Social Welfare Review under the agreed terms of reference with the technical assistance of the World Bank to target savings of ½ percent of GDP which can help finance a fiscally neutral gradual roll-out of the GMI in January 2016.
Adopt legislation to:
The Authorities recognize that the pension system is unsustainable and needs fundamental reforms. This is why they will implement in full the 2010 pension reform law (3863/2010), and implement in full or replace/adjust the sustainability factors for supplementary and lump-sum pensions from the 2012 reform as a part of the new pension reform in October 2015 to achieve equivalent savings and take further steps to improve the pension system.
Effective from July 1, 2015 the authorities will phase-in reforms that would deliver estimated permanent savings of ¼-½ percent of GDP in 2015 and 1 percent of GDP on a full year basis in 2016 and thereafter by adopting legislation to:
Moreover, in order to restore the sustainability of the pension system, the authorities will by 31 October 2015, legislate further reforms to take effect from 1 January 2016; (i) specific design and parametric improvements to establish a closer link between contributions and benefits; (ii) broaden and modernize the contribution and pension base for all self-employed, including by switching from notional to actual income, subject to minimum required contribution rules; (iii) revise and rationalize all different systems of basic, guaranteed contributory and means tested pension components, taking into account incentives to work and contribute; (iv) the main elements of a comprehensive SSFs consolidation, including any remaining harmonization of contribution and benefit payment rules and procedures across all funds; (v) abolish all nuisance charges financing pensions and offset by reducing benefits or increasing contributions in specific funds to take effect from 31 October 2015; and (vi) harmonize pension benefit rules of the agricultural fund (OGA) with the rest of the pension system in a pro rata manner, unless OGA is merged into other funds. The consolidation of social insurance funds will take place by end 2017. In 2015, the process will be activated through legislation to consolidate the social insurance funds under a single entity and the operational consolidation will have been completed by 31 December 2016. Further reductions in the operating costs and a more effective management of fund resources including improved balancing of needs between better-off and poorer-off funds will be actively encouraged.
The authorities will adopt legislation to fully offset the fiscal effects of the implementation of court rulings on the 2012 pension reform.
In parallel to the reform of the pension system, a Social Welfare Review will be carried out to ensure fairness of the various reforms.
The institutions are prepared to take into account other parametric measures within the pension system of equivalent effect to replace some of the measures mentioned above, taking into account their impact on growth, and provided that such measures are presented to the institutions during the design phase and are sufficiently concrete and quantifiable, and in the absence of this the default option is what is specified above.
Adopt legislation to:
Moreover, in collaboration with the OECD, the Authorities will:
Take the following actions to:
Adopt: (i) amendments to the corporate and household insolvency laws including to cover all debtors and bring the corporate insolvency law in line with the OCW law; (ii) amendments to the household insolvency law to introduce a mechanism to separate strategic defaulters from good faith debtors as well as simplify and strengthen the procedures and introduce measures to address the large backlog of cases; (iii) amendments to improve immediately the judicial framework for corporate and household insolvency matters; (iv) legislation to establish a regulated profession of insolvency administrators, not restricted to any specific profession and in line with good cross-country experience; (v) a comprehensive strategy for the financial system: this strategy will build on the strategy document from 2013, taking into account the new environment and conditions of the financial system and with a view of returning the banks in private ownership by attracting international strategic investors and to achieve a sustainable funding model over the medium term; and (vi) a holistic NPL resolution strategy, prepared with the help of a strategic consultant.
Launch a consultation process to review the whole range of existing labour market arrangements, taking into account best practices elsewhere in Europe. Further input to the consultation process described above will be provided by international organisations, including the ILO. The organization and timelines shall be drawn up in consultation with the institutions. In this context, legislation on a new system of collective bargaining should be ready by Q4 2015. The authorities will take actions to fight undeclared work in order to strengthen the competitiveness of legal companies and protect workers as well as tax and social security revenues.
Adopt legislation to
On electricity markets, the authorities will reform the capacity payments system and other electricity market rules to avoid that some plants are forced to operate below their variable cost, and to prevent the netting of the arrears between PPC and market operator; set PPC tariffs based on costs, including replacement of the 20% discount for HV users with cost based tariffs; and notify NOME products to the European Commission. The authorities will also continue the implementation of the roadmap to the EU target model prepare a new framework for the support of renewable energies and for the implementation of energy efficiency and review energy taxation; the authorities will strengthen the electricity regulator’s financial and operational independence;
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