Greece: looking on the bright side …

We’ve been writing quite a bit on Bull Market about the Greek crisis and the ways things could go wrong, but it’s also worth thinking about — how might things go right?

Although one wouldn’t guess it from a lot of the grandstanding, there is actually a lot of will to reach a deal. The troika wasn’t all that far from concluding a renewed program with the Greek government before the election, and although Syriza have come in with a lot of new ideas and started going about them all in a pretty chaotic way, they’re not unable to negotiate. So what would a guess be at an eventual outcome? Here’s mine:

1. Primary surplus. This is the most important thing to agree, because it’s the biggest immediate influence on the Greek economy. Clearly, here, the large and growing surplus targets pencilled in the original plan (rising as high as 4.5% of GDP between now and 2020) are ridiculous. So far, the only concrete proposal that’s been made is Yanis Varoufakis’ suggestion of a 1.5% surplus, in the context of his debt restructuring plans. That actually seems pretty unambitious to me, given that more or less nobody in the policy structure believes in expansionary austerity any more. I would have guessed that a zero balance would be the negotiated outcome, and since I think the debt restructuring plan is a non-starter, I still think that a more generous agreement on the primary balance is possible.

Will the creditor countries accept this? Well, a reduced primary surplus means that more money has to come from them, so it’s not ideal from their point of view. And the last holdouts, the boys on the burning deck of expansionary austerity tend to be located in creditor country finance ministries. But on the other hand, although large relative to Greek GDP, the sums of money involved are small compared to the size of Europe, and small relative to the Europe-wide costs of not getting a deal. Additionally, a program which depends on the creditors continuing to put up more money allows them to preserve their political relevance. If a deal is agreed with primary surpluses in it, then all of the other conditionality goes by the wall. So:

Primary balance — 0%

2. Debt reductions. My intuition is that this is still too politically sensitive for the creditor countries to agree large face value reductions. But extending the maturity and reducing the coupon is the sort of thing that they’ve been doing ever since the program began. Personally, I don’t see very much point in rinky-dink financial engineering solutions — particularly GDP-linked versions which would only be the occasion for pointless recrimination about the accuracy of statistics. But a straightforward extend and reduce deal seems totally reasonable. So I’d guess that this is the quid pro quo for the primary balance changes; Varoufakis was looking for a primary surplus of 1.5% and a reduction of the interest bill to something like zero, while I’d shift the numbers around a bit for a similar overall budget in flow terms, not particularly caring about the headline numbers:

No change to face value, ~30% NPV-terms reduction in official sector credit

3. Privatisations and structural measures. This is one where the creditor countries are really going to be very reluctant to give any ground. If Greece doesn’t keep a lid on civil service overmanning and continues to have a load of low-efficiency nationalised industries, then there is never going to be any prospect of the cyclically-adjusted balances even stabilising, let alone recovering. The decision to postpone the ports privatisation in the hope of getting a better price seems like a very forlorn hope, particularly when the cost of doing so is to keep a whole load of toxically politicised industrial relations on the government’s list of responsibilities. Similarly, hiring back civil servants is just a jab in the eye to the creditors, and doesn’t really have enough macroeconomic effect to be worth doing. The minimum wage increase is difficult for Syriza to give up, because it was a high profile campaign promise. But again, big increases (even though these would really only undoing previous cuts) is very hard for the creditor countries to swallow, and doubly so because it locks in the kind of relative cost imbalances which ensure that the need for fiscal transfers from the core to Greece will never end. So I think this one ends up being a red line issue for the troika. Prediction would be:

Greatly reduced or zero minimum wage increase. Civil service hiring reduced, but no further cuts vs program. Ports privatisation delayed but rescheduled

4. Tax and collection issues. I don’t see any way that the property tax can be abolished, particularly since if the primary surplus targets are fixed, any money lost on the tax side has to be made up for else where. If a huge amount of money was taken in by the oligarch-hunting exercise, that might change but this seems unlikely — getting money out of Switzerland takes time, commitment and German-speaking lawyers. So I would guess:

Property tax remains

5. Other issues / Euroland solidarity funds. On the balance so far, it seems to me that Syriza has ended up giving up quite a bit more than they would want to. So the troika side needs to throw something back into the pot. This is where the otherwise widely ridiculed Juncker investment plan might come in. This idea is surprisingly similar to an original concept from Yanis Varoufakis’ “Modest Proposal” documents, which also called for large amounts of investment in Greek infrastructure, channelled through the EIB and supported by guaranteed bonds (through the EIB because, at the time, Varoufakis didn’t trust the Greek government to spend it properly; although he might have changed his mind now he’s in it, the scheme could be appealing to troika members for this reason). So I’ll shoot for:

EUR30bn of investment spending over five years, outside the Greek sovereign budget.

So, that’s my guess at how this thing will end if everyone is sensible and the troika doesn’t demand politically impossible things of Greece. There are a lot of failure modes, a lot of ways for it to break down and the extent to which troika members actually want Greece to remain in the Euro certainly can’t be taken for granted. But Europe is used to muddling through and in my view, this muddle is better than most. Let’s see if I’m right …

Dan Davies is Senior Research Advisor at Frontline Analysts