Measures should be enough to satisfy Greece's official creditors by now, but Greece will struggle to secure further funding if agreed targets continue to be missed.
IHS Global Insight Perspective | |
Significance | The Greek Ministry of Finance announced yesterday (21 September) a new set of austerity measures aimed at securing the disbursement of the sixth tranche of funds—worth EUR8 billion—under the original EUR110 billion (USD148 billion) bailout programme. |
Implications | These measures include an increase to the income tax tax-free threshold and cuts in pensions and public jobs. |
Outlook | Although these measures should be enough to secure the sixth tranche, IHS Global Insight believes Greece will struggle to gain further finance if no progress on the fiscal, privatisation and reform fronts is shown. |
The Greek Ministry of Finance announced yesterday (21 September) a new set of austerity measures aimed at securing the disbursement of a sixth tranche of funds—worth EUR8 billion (USD10.8 billion)—under the original EUR110-billion bailout programme. Without these funds, it is estimated Greece will run out of money by mid-October.
The measures announced, which still need to be approved by Parliament, include the following:
- The tax-free threshold for the levy of income tax will be lowered from EUR8,000 to EUR5,000;
- Pensions above EUR1,200 a month will be cut by 20%. Meanwhile, pensioners under the age of 55 will have their entitlement over EUR1,000 a month cut by 40%;
- Around 30,000 civil servants will be put into "labour reserve", earning 60% of their salary, for one year;
- The tax on real estate announced earlier this month (see Greece: 12 September 2011: Greek Government Unveils New Property Tax), which was originally expected to be in place until 2013, will be extended until at least 2014.
More Austerity Risks Worsening Social Situation
Given the extreme weakness of the Greek economy, further austerity risks having a counterproductive impact on public finances. Moreover, it risks worsening the already fragile public support for the government's programme. Indeed, the measures will prove highly unpopular with the country's trade unions as well as public. One of the country's main trade unions, ADEDY, on Tuesday (20 September) staged a symbolic protest against the cuts (see Greece: 21 September 2011: Greece Hit by Fresh Strike over Expected New Austerity Round), while also calling 24-hour nationwide strikes for 5 and 19 October. Furthermore, today's strike of transport workers in the capital Athens has already commenced, with bus, train and taxi transport being halted, while air traffic controllers are also expected to stage work-stoppages for a few hours later this afternoon. Some civil servants, including teachers, have also stopped work. Today's strikes are likely to be accompanied by protest rallies; however, the unions' efforts will mainly concentrate on the October action, which could even see recently declined protest-participation rise. Although some Greeks believe the cuts are needed, the public support for the measures has waned, not least as many see the government's plans as "chaotic" and failing to bring desired results. The public criticism is fuelled by angry unions and the political opposition's criticism. Still, the government seems to be doing a poor job of changing public opinion: just after passing the new cuts, Finance Minister Evangelos Venizelos declared that Greece had no choice but to continue with its austerity programme as the "markets are blackmailing us [Greece] and under the circumstances are humiliating us". Such comments will only fuel public opposition to the intervention from international creditors, and will do little to increase public sympathy for the government's action and increase its falling popularity. The government seems to be united behind the latest cuts; however, given that a number of the ruling Panhellenic Socialist Movement (PASOK) party's MPs previously protested against additional cuts, it is yet to be seen how long such unity will last.
Outlook and Implications
Negotiations regarding the sixth tranche have been long and difficult. Greece's official creditors have shown signs of being increasingly dissatisfied with the failure of Greece to meet targets not only on the fiscal front, but also on the implementation of structural reforms. In IHS Global Insight's view, yesterday's measures, which follow a series of conference calls between Athens and the "troika" in recent days, should be enough to secure the EUR8 billion due by the end of the month. We expect the final decision to be made public during the next meeting of Eurozone finance ministers—Ecofin—scheduled to take place on 3 October.
The measures will not be enough, however, to secure the disbursements of future tranches. The seventh tranche—worth EUR5 billion—is due in December and Greece may struggle to secure it if no progress is shown. A sharper-than-expected recession and poor implementation of the measures already approved means the target of a fiscal deficit of 7.5% of GDP by end 2011 will surely be missed by a significant margin. Moreover, there is a worrying lack of progress on the implementation of the government's privatisation plans. Greece is set to miss an interim target of EUR1.7 billion in privatisation receipts by the end of September while the target of EUR5 billion in sales by the end of the year looks very difficult to achieve.
Given the worsening scenario, we believe that Greece's destiny lies in its creditors' hands. Despite increasing signs of frustration among politicians in some countries contributing to the bailout, we believe that Germany will try to keep Greece afloat, at least in the short run, as a default could have destabilising consequences for the rest of the area. The main concern is that a disorderly Greek default over the coming months might provoke a domino effect in countries like Italy and Spain, which are themselves in a fragile situation.