Straightforward review seems unlikely

Government spokesman Dimitris Tzanakopoulos suggested last Thursday that Athens is preparing to redistribute some 1 billion euros from the amount by which this year’s primary surplus will exceed its target of 1.75 percent of gross domestic product. Tzanakopoulos said that these funds would go to the social groups that have been most deeply affected by the crisis.

Greece went down a similar road last year, when around 500 million euros was distributed among hundreds of thousands of pensioners after the fiscal target was beaten. However, the difference is that last year the government took the decision without clearing it with the lenders first.

There is little chance of the same thing happening this year. Firstly, Finance Minister Euclid Tsakalotos was forced to pledge in writing last December that the coalition would consult properly with the institutions in the future over how to use its excess surplus. He also promised that any future fiscal over-performance would be used “in targeted measures for the strengthening of social protection and/or reduction in the tax burden and/or creation of a cash buffer and/or for arrears clearance.”

The other reason that there will not be a quick handout while the creditors are not looking is that the way the excess surplus will be distributed will be one of the items that will be discussed between the creditors’ mission chiefs and Greek government officials, who are due to begin talks in Athens today with the aim of concluding the third review as swiftly and painlessly as possible.

The institutions will be keen to assess where the primary surplus will end up at the end of the year and how much of an out-performance there will be for the coalition to play around with. After satisfying themselves on this issue, the creditors will also have to decide with Greek officials how these funds will be spent.

The institutions are likely to favor the further reduction of arrears and the building up of Greece’s cash buffer ahead of next year’s program exit, rather than the more politically expedient distribution of cash among low-income groups.

However, this is likely to prove one of the more straightforward parts of the discussions between the government and the mission chiefs. There are many other areas of the review that are likely to prove more complex.

On the fiscal side, the projections for next year seem more of a headache at the moment than any concerns about the surplus distribution. The International Monetary Fund (IMF) has indicated it will not ask for more measures next year despite expecting Greece to produce a primary surplus of 2.2 percent of gross domestic product, compared to the 3.5 percent target. The European lenders’ position is not yet clear and, given the decline in revenues so far this year, it remains a possibility that they will want the government to commit to more measures next year to bridge any fiscal gap. This could prove a sticking point as the government has already publicly ruled out the possibility of any fiscal interventions beyond what has already been approved for next year.

Another area of concern is that the government is nowhere near completing the 95 prior actions included in the third review. It is estimated that only around 20 have been ticked off. Although Athens seems encouraged by the fact that completing the remaining tasks will not require much legislative activity, it has still left itself with a mountain to climb if its target of reaching a staff-level agreement before the end of the year is to be achieved.

Almost a third of the prior actions relate to privatizations. Although Prime Minister Alexis Tsipras has vowed that the sell-offs will move ahead, the recent complications surrounding the former Athens airport at Elliniko and Eldorado Gold’s investment in Halkidiki have been noted by the creditors.

The upcoming privatizations include the politically sensitive sales of the Athens and Thessaloniki water companies, which SYRIZA had been opposed to for many years.

Energy-related issues also account for seven of the prior actions. The most challenging matter is the sale of 40 percent of Public Power Corporation’s (PPC) lignite-powered units. This has been a concern for SYRIZA deputies whose constituencies lie in the areas where the power stations are located. Apart from the sale of the PPC units, a deal is being sought on the medium-term plan for the natural gas market, with the lenders demanding that state-controlled natural gas firm DEPA’s share be reduced.

Perhaps the biggest threat to a swift and smooth review is Greece and all its creditors arriving at the same page on the state of the country’s banks. The IMF has backed down over its long-standing demand for asset quality reviews (AQRs) to be carried out next year after the European Central Bank agreed to move forward the stress tests for Greek lenders.

Local banks will now be scrutinized by the ECB’s Single Supervisory Mechanism in spring, well in advance of the end of the program in August 2018.

Nevertheless, there is pressure from the ECB and other European lenders on Greek banks to start reducing their nonperforming loans (NPLs) at a faster rate than they have done so far. The delay in the electronic auction system for foreclosures, which is already meant to be fully functioning but is now not due to be up and running before late November or early December, has not helped lenders as regular auctions in courts are continuously blocked by protesters.

The targets submitted to the SSM in September 2016 foresee non-performing exposure (NPE) falling by 37.7 percent or by 40.2 billion from the second quarter of 2016 until the end of 2019. The targeted reduction in NPLs is 48.7 percent (or 38.1 billion) during the same period. Greek banks succeeded in meeting their NPE reduction target in Q2 2017, but this was mostly due to write-offs.

Reuters reported last week that Piraeus, National and Alpha plan to sell 5.5 billion euros of NPLs by March. Eurobank recently sold bad loans with a face value of 1.5 billion euros to Sweden’s Intrum. Nevertheless, the institutions will want to make sure that the Greek banking system is well on the way to healing its wounds before the country exits the program next summer.

All this means that even though everyone would like the review to pass off uneventfully, we are unlikely to avoid some of the drama we have become used to over previous years.