Greece and the Troika: Summer Break

The Greek government has reached agreement with the Troika (European Central Bank, European Commission, and IMF) on a set of policies putting its program back on track and opening the door for €8.1 billion in tranches over the summer, which should finance the government until September.  To get this done involves moving forward lending originally scheduled for later years.  That means a large financing gap looms for 2014.  But that’s an issue for after the summer break.

Under the agreement, the Greek government will take a number of fiscal measures to meet their fiscal targets (closing a €2 billion gap) and achieve primary balance this year.  This includes a luxury tax, a unified property tax, reduced pensions for military personel, and other social safety net reforms.  The government also has agreed to move forward with plans to reduce government employment by up to 25,000 through a mobility and reallocation scheme.  These were tough measures, which for a while looked like they could destabilize the government.  The government will get credit from European leaders for getting this done, even as it becomes apparent that prospects for recovery remain distant.  (The IMF forecasts a fall in activity in excess of 4 percent this year followed by positive growth of just 0.6 percent in 2014.)

Austrian Finance Minister Maria Fekter summarized the optimism:  “I’m convinced that Greece is making every effort to meet these goals…The summer break is coming up and I really don’t fancy coming to Brussels during that period.”

My concern here, as in Cyprus (where the program is going off track) and Portugal (where an agreement to preserve the government appears predicated on a request for a relaxation of their program) is that flaws in these countries’ programs are being papered over on the hope that easier times—additional financing and/or debt relief—will come after German elections in September. It’s a big ask, and sets us up for disappointment this fall.  But summer vacations are saved.

This piece is cross-posted from Macro and Markets with permission.