Greek Prime Minister Alexis Tsipras optimistically told Bloomberg TV on Thursday that he expects to clinch a deal with Greece’s creditors only 48 hours after Greece’s referendum vote on Sunday which concerns Greece accepting the bailout terms of their creditors that would allow Athens to qualify for a new bailout package and remain a euro member.
Tsipras requested the democratic referendum vote at the eleventh hour due to his own refusal to accept the terms of the last proposed bailout package offered last week from Greece’s creditors which comes after 5 months of failed negotiations and opposition from Athens to submit to its northern power brokers.
Tsipras never mentioned during his interview with Bloomberg T.V. that his leftist anti-austerity government is in no power position to “clinch” any deal soon with Greece’s creditors or dictate the terms of any future bailout agreement for the deeply indebted country that is in recession with new capital controls imposed on its population which has over 25 percent unemployment, the highest in the 19 member euro area.
Clinching any future bailout agreement requires Alexis Tsipras’ leftist Syriza Party to make concessions to Greece’s creditors and agree to an austerity proposal they campaigned against, a fact that Tsipras failed to mention during his Bloomberg TV interview.
Greece has already paid a heavy price for electing Greek Prime Minister Tsipras and his radical leftist political team that defiantly opposed accepting the austerity measures from their creditors, resulting in Greece defaulting on their €1.6 billion debt to the IMF after their bailout extension expired on June 30th with no new bailout deal worked out.
The IMF reported yesterday that Athens owes a lot more money to secure the Greek economy over the long term.
The IMF reported on Thursday that Greece needs an extra €60 billion in funds and debt relief over the next 3 years to create “breathing space” needed to help stabilize the Greek economy.
Recent capital banking controls imposed on Greece for failing to workout a new bailout agreement with their creditors over the week-end has already slowed the Greek economy which sunk into recession territory this year.
IMF chief economist Oliver Blanchard explained in his blog that under Greece’s 2012 bailout program, Greece was to generate enough of a primary surplus to limit its indebtedness. Greece agreed to a number of reforms which should lead to higher growth. European creditors were to provide the financing and debt relief if Greece’s debt relief exceeded 120 percent by the end of the decade.
The primary surplus in the program was to be 3% in 2015, and 4.5% next year. But recent economic and political developments in Greece over the past several months have made this an unattainable goal, and the target clearly must be decreased, Blanchard maintained.
“A lower target leads to a less painful fiscal and economic adjustment for Greece. But it also leads to a need for more external official financing, and a commitment to more debt relief on the part of the European creditor countries. Just as there is a limit to what Greece can do, there is a limit to how much financing and debt relief official creditors are willing and realistically able to provide given that they have their own taxpayers to consider” Blanchard wrote.
“Greek citizens, through a democratic process, have indicated that there were some reforms they do not want. We believe that these reforms are needed, and that, absent these reforms, Greece will not be able to sustain steady growth, and the burden of debt will become even higher. Here again, there is a trade off: To the extent that the pace of reform is slower, creditors will have to provide more debt relief. Here again, there is a clear limit to what they are willing to do” Blanchard wrote.
Blanchard said that “even the lower new target cannot be credibly achieved without a comprehensive reform of the value-added tax (VAT) – involving a widening of its base – and a further adjustment of pensions”.
Currently pensions account for 75 percent of Greece’s primary spending which represents 16 percent of GDP. Transfers from the budget to the pension system are close to 10% of GDP.
“We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners. We are open to alternative ways for designing both the VAT and the pension reforms, but these alternatives have to add up and deliver the required fiscal adjustment” Blanchard wrote.
Blanchard said that European creditors would have to agree to significant additional financing and to debt relief sufficient to maintain debt sustainability. He believes that under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates and explained that any further decrease in the primary surplus target, now or later, would probably require, however, haircuts to Greece’s debt pile.
To date, Greece has €21.2 billion in outstanding obligations to the IMF. A repayment of nearly €1.6 billion was due to the IMF on June 30, 2015 but that repayment was not made by the leftist Greek government.