Greece Must Walk the Talk, and Soon

APRIL 6, 2015

The New  York Times

By HUGO DIXON | REUTERS

Greece has two weeks to produce some red meat.

The prospect of a default is off the table for the time being after Yanis Varoufakis, the country’s finance minister, confirmed that Greece would meet a payment to the International Monetary Fund on Thursday. But, with more payments looming, the fear of bankruptcy will be back by the end of April if Greece doesn’t come up with some serious overhauls by then.

Without those, its eurozone creditors will refuse to lend it more money, and Athens will then probably suffer a disorderly default.

Athens has scraped together enough cash to meet the I.M.F. payment, in part by extracting liquidity from quasi state entities. However, the left-wing government has pretty much exhausted its techniques for squeezing blood from a stone. Meanwhile, it has largely wasted two and a half months in office by lecturing its creditors, sending out mixed messages about its willingness to default and coming up with amateurish overhaul plans.

Now the government needs to get serious and — unless Prime Minister Alexis Tsipras is really willing to default — impose vicious capital controls and exit the euro.

Athens’s eurozone creditors are still hanging tough. Although they do not want Greece to enter a spiral of self-destruction and are worried about the fallout it if does, they do not trust what the government says. As a result, the creditors rightly want to see some meaningful actions before they lend Greece more money.

Mr. Tsipras needs to show he means business, by suffering some political cost at home as a result of implementing unpopular measures. Otherwise, there is a risk that the government will take the cash, continue to speak with a forked tongue and still default in June if it can’t get a new long-term deal to its liking.

In the next two weeks — running up to a meeting of eurozone finance ministers on April 24 — the two sides should focus on three issues.

First, pensions. Although Athens has pushed up the retirement age in recent years, the current system is riddled with exemptions that allow many privileged people to receive early pensions.

Not only has Mr. Tsipras so far been unwilling to close these loopholes, he wants to restore the so-called 13th pension, a bonus Christmas payment, to over a million pensioners at a cost of 600 million euros, or about $658 million. He also wants to pay €326 million in supplementary pensions.

While there may be a case for increasing pensions for the very poorest people, Mr. Tsipras’s 13th pension would kick in for anybody who receives less than €700 a month, and supplementary pensions would benefit those who are already getting basic ones. So the government’s plans are more about dishing out goodies to its supporters than meeting genuine need.

Second, tax. Athens’s latest 26-page overhaul document, submitted to creditors last week, contains a host of ideas for cracking down on tax evasion. Many are good, including audits on large offshore transfers, to home in on untaxed income; and issuing lottery tickets to customers who demand receipts, as a way of combating avoidance of value-added taxes. Athens also wants to strengthen the independence of its tax authority, with which previous governments have interfered.

The snag is that the government expects these and other proposals to produce €4.7 billion to €6.1 billion of revenue this year. Maybe in time they will generate significant cash, but neither Athens nor its creditors should count on much in 2015. Since deep reform is more important than fiscal austerity, the government should be told to carry on with these measures but not factor much revenue from them into its fiscal forecasts.

Third, banking. Athens rightly says the sector has been marred by clientelism and too close a link with the political system. The snag is that the government has seemingly continued to meddle.

Since Mr. Tsipras took office in January, the chairmen of two of the largest banks, the National Bank of Greece and Eurobank, have both been replaced with people who are close to the new government. Meanwhile, the chairman of the Hellenic Financial Stability Fund, the bank bailout fund through which €40 billion of creditors’ money has been channeled, has been forced to resign.

These are worrying developments, given that there is no official channel through which politicians can bring about management changes in commercial banks and that the fund was supposed to be at arm’s length from the government. Athens’s latest promise to enhance the fund’s independence rings hollow.

Meanwhile, the government wants to set up a so-called bad bank to manage some of the industry’s nonperforming loans. While this is an excellent idea in principle — which could result in the creation of good banks that would start providing credit to the real economy again — it could lead to yet more clientelism given the sector’s repoliticization.

Greece’s creditors should insist on a proper explanation of what happened with the recent management changes and possibly unwind some of them. The creditors should also find more effective ways of depoliticizing the industry before agreeing to finance a bad bank.

Athens has decided to avoid a confrontation with its creditors this week. But unless it gets its skates on and uses the two-week window to produce serious overhauls, it will not be able to postpone one for long.

Hugo Dixon is editor at large of Reuters News.