Shortage of trust threatens Greece's comeback

Sun Dec 6, 2015 4:15am EST Related: WORLD, GREECE

ATHENS | BY PAUL TAYLOR

After a tumultuous year of two elections, a referendum, a default, a bank shutdown, capital controls and a tidal wave of migrants, it's amazing that Greece is still standing, like the Parthenon towering over Athens.

Yet the visitor's first impression is not of a country in deep depression in the eighth year of a recession that has shriveled economic output by more than 25 percent and put one in four people out of work.

For sure, there are more beggars in the streets, public health is declining and many Greeks have stories of hardship in their family. But the bars and restaurants are full, Christmas lights glitter and there is plenty of money being spent in the stores in central Athens.

The paradox is that the situation is worse than it looks.

After a near-death experience in mid-year, when Prime Minister Alexis Tsipras' radical leftist government rejected a bailout deal with creditors, defaulted on an IMF loan, called a referendum to defy them and had to shut banks for three weeks and ration cash, Greece is in remission.

A re-elected Tsipras government is methodically enacting measures demanded by a third bailout program eventually sealed in August, cooperating better with creditor institutions, and has successfully recapitalized the four big systemic banks.

Soft-spoken Finance Minister Euclid Tsakalotos is working to build a track record of delivering results, hoping for a deal to restructure and stretch out Greece's debt to the euro zone by the spring and an economic lift-off in the second half of 2016.

The economy is flatlining but did not suffer the deep slump economists forecast due to the capital controls. Many people had anticipated the worst and stuffed cash under the mattress or in foreign accounts accessible with credit cards, officials say.

But whether that tentative political and financial stabilization turns into a sustained recovery hinges on trust, which remains in very short supply.

MUTUAL SUSPICION

Even though Klaus Regling, head of the euro zone's bailout fund, said last week that "some trust has been established again", euro zone governments have little faith in Greece after this year's turmoil, and are keeping it on a tight leash.

The feeling is mutual. Resentment of German Finance Minister Wolfgang Schaeuble, who tried to bounce Greece out of the euro in July, seethes just below the surface in ministers' offices.

On the migration crisis, too, there is deep suspicion between Athens and its European partners, some of whom dangled a threat of suspending Greece from the open-border Schengen zone to force it to accept EU assistance in managing its borders.

The Greeks feel they have borne the brunt of arrivals with scant EU financial or practical support. Other governments accuse Athens of failing to control the EU's external border or register migrants before waving them through to northern Europe.

That is by no means the only trust gap.

The business community doesn't trust the government because of unpredictable tax rises and regulatory uncertainty, and because the state owes the private sector some 6 billion euros ($6.53 billion) in arrears.

Tsipras appealed for foreign investment at a Greek-American business conference in Athens last week. But his administration is still hesitant about privatization, loath to cede ownership and prone to anti-capitalist rhetoric.

Moreover, Greece deters investors by depicting itself as crushed by an crippling debt mountain and a victim of predatory creditors rather than as a land of opportunity for business.

"You have to have a positive story and sell a business case," said John Moran, a former secretary-general of Ireland's Department of Finance who helped steer Dublin's textbook recovery from its EU/IMF bailout program.

On the political front, the three center, centrist and center opposition parties which backed the bailout deal in parliament are refusing to help the government on the sensitive issue of pension reform.

SHRINKING MAJORITY

Neither side trusts the other's motives. The former ruling groups - co-responsible for Greece's patronage-laden system - are only too happy to turn the tables on Tsipras' leftist Syriza party, which stoked public anger over austerity and pension cuts when it was in opposition.

Analyst Nick Malkoutsis of the Macropolis economic consultancy says there is also a lack of trust between the pragmatic Tsipras and his own party, even after hard leftists were defeated and quit Syriza during the summer.

The ruling coalition's majority has already shrunk to three seats, making Tsipras vulnerable to defections by objectors to the impending pension reform, which is bound to entail lower benefits and higher contributions, or by lawmakers exploiting their position to seek jobs or favors.

"He risks his majority going completely when he brings pension and tax reform to parliament," Malkoutsis said, although he noted Tsipras might be able to recruit the nine-member Union of Centrists to shore up his coalition.

A senior government official close to Tsipras said he is sure there will be a majority for "very brave choices" to unify the multiple, chronically underfunded pension funds.

There is also little trust between the Syriza government, mostly made up of academics with little government experience, and a weakened and demoralized state administration.

One civil servant, speaking on condition of anonymity, said many ministers behaved like amateurs. The Tsipras aide countered that Syriza, as outsiders, faced "all the problems of Greek bureaucracy ... but we can use our political leverage and mandate to make things happen".

The risk is that even if ministers pull the right levers, nothing may happen in the engine room.

($1 = 0.9187 euros)

(Writing by Paul Taylor; Editing by Stephen Powell)