Review impasse threatens alarming situation

There is a risk that if the current pace of negotiations between Greece and its creditors remains unchanged, the sound of the church bells at Easter on April 16 will be drowned out by the alarm bells signalling serious danger for the country’s economy.

All sides have accepted that there will not be a breakthrough at Monday’s Eurogroup meeting in Brussels. The Greek government hopes that it will be confirmed at the end of the gathering of eurozone finance ministers that several loose ends, such as the out-of-court workout and energy market liberalization, will be tied up and that only one issue will remain to be resolved: Labor reform.

This best-case scenario presupposes that there will also be an agreement on the roughly 2 percent of gross domestic product (3.6 billion euros) in new fiscal measures and expansionary counter-measures that will form one of the key parts of any settlement to conclude the bailout review. While this was a topic of discussion during the teleconferences between the technical teams representing Greece and its creditors last week, there were doubts about whether any common ground had been found.

Also, as highlighted in this column a week ago, the path to an agreement on labor reforms is full of obstacles. Matters were complicated last week when European Economic and Monetary Affairs Commissioner Pierre Moscovici said that Brussels would like Greece to be “within the framework of the European social model” as far as its labor legislation is concerned.

Speaking to MEPs in Brussels, Moscovici also suggested that the Commission believes that the recommendations made by the panel of experts appointed by Athens and the institutions last year to examine the Greek labor market should form the basis for any decisions. In this respect, the European Union’s executive arm appears to be siding with Athens in this particular dispute, although this has not yet translated into any progress in the discussion about the subject.

A eurozone official who spoke to reporters in the Belgian capital last Thursday admitted that the disagreement over labor reforms appears to be the biggest obstruction toward a technical, or staff-level, agreement being reached. Finance Minister Euclid Tsakalotos told Greek deputies in Athens on the same day that the differences could be overcome between Monday’s Eurogroup and the next one, which is due to take place in Malta on April 7.

It seems, though, that this will require either Athens or the International Monetary Fund, or both, to make concessions because the option of dropping labor reforms from this review and tagging them onto the next one is out of the question. At least, that is what the eurozone official told the media on Thursday.

This suggests that the onus is on all sides to reach a compromise that will allow the review to be wrapped up and everyone to move on. “There is no upside to procrastination,” the unnamed eurozone official said. Of course, the problem for the Greek government is that the biggest downside to any further delay is felt by the country’s economy, and consequently its people.

The tell-tale signs of the ongoing erosion of confidence and increasing concern about the uncertainty were visible in various economic data that were made public over the past few days.

For example, the budget execution figures released last Tuesday showed that there was a 2.1-billion-euro primary surplus for the first two months of the year, which was 1.2 billion euros more than the target. However, this was about 25 percent lower than during the same period last year and was partly achieved because expenditure was nearly 900 million euros lower than it should have been by the end of February.

Apart from the state not paying some of its bills, the other worrying sign in the budget execution data is that tax revenues are also starting to look a little shaky. Gross revenues beat their target by 170 million euros but this was on the back of a one-off dividend received from the Bank of Greece’s 2016 net profits, which was 334 million euros more than expected. Without this, revenues would have dipped below their target.

There was also a sharp rise in January in the rate of unpaid taxes being accumulated. They increased by 1.6 billion euros over the course of the first month of the year, which is the highest monthly rise on record since 2013, when this data was first published.

The other warning sign was to be found in the monthly financial statement on Greek banks’ Eurosystem funding, which was also published on Tuesday. It showed that there was a 330-million-euro increase in the emergency liquidity assistance (ELA) funding drawn by Greek banks from the country’s central bank in February. The amount, which was relatively minor, was not as significant as the fact that the increase in ELA last month reversed a trend that began last May, which saw this more expensive form of funding decrease month after month.

The uptick is believed to be linked to the recent climate of uncertainty, which has also led to an increase in the outflow of deposits from Greek banks over the last couple of months.

These issues were addressed by the head of the Single Supervisory Mechanism (SSM) of the European Central Bank, Daniele Nouy, during her visit to Athens last week, when she met with local banking officials. She told Skai TV that the increase in the deposit outflow and nonperforming loans were “a little bit disappointing.”

“We hope it is temporary,” she said in relation to the news that ELA for Greek banks had increased for the first time in several months.

Nouy’s response closely reflects what everyone who is involved with the Greek economy is thinking at the moment. They are hoping that the impasse in the negotiations, which has pushed a number of economic indicators in the wrong direction, is just temporary and that there will be a breakthrough soon, opening a path toward stability and potential recovery.

The warning signs of what damage further delay could do to the economy are already discernible, whether you look at macroeconomic or financial data. It is now up to the Greek government and its creditors to take notice and ensure that the alarm bells remain silent over Easter and beyond.