Is Greece losing its reform drive?

By Hugo Dixon JUNE 23, 2014

Reuters

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

Is Greece losing its reform drive? Prime Minister Antonis Samaras has stuck to a harsh fitness programme for two years. But just as it is bearing fruit, he has sidelined some reformers in a reshuffle. There is only one viable path to redemption for Athens: stick to the straight and narrow.

The Greek economy is not out of the woods yet, although the measures taken to balance public finances and restore the country’s competitiveness are having their effect.

Athens partly regained access to the bond markets in April. Banks have been able to issue equity on the markets. The unemployment rate has fallen for four months in a row, albeit to a still terrible 27 percent. The economy has also either just stopped shrinking or will do soon.

Greece’s top industry, tourism, is set to reach new highs this summer following last year’s record. Meanwhile, foreign investors are looking to take advantage of cheap labour, cheap real estate and a better investment climate. Only last week, the Chinese prime minister was in Greece, signing $4 billion of commercial deals and declaring that the country could become China’s gateway to Europe.

One might have thought Samaras would stick with the team that helped deliver this success. But the prime minister was scared after his centre-right New Democracy party was beaten into second position in the European Parliament elections last month by Syriza, the radical left group, and so he has promoted some populist politicians.

In the process, Yannis Stournaras, the former finance minister, was moved to the less critical if still important role of central bank governor. The ministers for economic development and health, who had been among the most effective reformers, were also demoted.

The new finance minister, Gikas Hardouvelis, a respected economist, has attempted to reassure the euro zone governments, which are Greece’s main creditors, that the country remains committed to its reform programme. But some of the other new ministers have started criticising the measures Greece has already agreed to implement. Even if Samaras reins them in, the new team is unlikely to be as effective in executing the plan as the old one.

What’s more, the head of the quasi-independent tax agency was forced to quit. This was because he had made a mistake in issuing a circular saying that holders of Greek bonds would face retrospective taxation, according to two officials. His replacement will be chosen by a committee which includes France’s top tax official, so there’s no risk of cronyism, they say. Greece’s euro zone partners and the International Monetary Fund are not totally convinced by the explanation. Given that one of Greece’s deepest problems has been tax evasion, they are anxious that politicians shouldn’t start meddling with the tax agency again.

All this is unfortunate, as Athens still needs its creditors’ support to secure better terms on its massive debt load. The outlines of a deal have already been sketched: freezing the interest rate at below 1 percent; increasing the “grace period” before any of the debt needs to be repaid; and extending the period over which the borrowings are ultimately paid off by another decade or so.

The extended grace period is especially important as private investors would no longer worry about Greece running out of money for many years. Athens could then issue longer-term debt on the bond markets. This, in turn, would mean that the government wouldn’t need to beg for more cash from its euro zone partners for the foreseeable future.

The snag is that Greece’s creditors will not formally agree to this debt relief deal until they are satisfied that Athens is sticking to the approved reform programme – and the reshuffle has just raised questions about that. As a result, the IMF’s review of Greece’s progress, which starts in the autumn, could drag on into next year.

For its part, the government is concerned that it won’t just have to convince its creditors that it is still on track with reforms but that it will have to wait until it is clear how much, if any, extra money it has to pump into its banks. Although there will be some visibility on this after the European Central Bank completes its stress tests on large euro zone lenders in the autumn, the government is anxious that it will be forced to wait several months after that to clarify whether the market will provide the funds.

A few months’ delay matters because a new Greek president has to be chosen by parliament in the new year and, unless 60 percent of MPs back the president, there has to be an early general election in March 2015. It is touch and go whether Samaras can scrape together the necessary majority.

As a result, the premier is worried that he’ll have to fight an election without a debt deal under his belt. That may be another reason he is flirting with populism.

This would not be a route to success. If the Greek people want populism, they will vote for the genuine article, Syriza, not a pale imitation.

Samaras’ best bet is to convince Greece’s creditors that he isn’t wobbling on reform and that they should complete the debt deal by year-end. His single-minded aim should be to have a really good story about how reform pays off if he has to face the Greek people in the spring.