The European Commission is about to revise Greek 2017 GDP growth forecast down to 2.0% from 2.7%, an EU official said on Friday.
The Commission published its latest forecast on February 13 where it saw Greek 2017 GDP growth at 2.7% but noted that “downward risks mainly relate to uncertainties over the completion of the second review of the ESM programme”.
Prolongued negotiations between the Greek government and Greece’s creditors have taken a toll on the economy and the International Monetary Fund has lowered its forecast for the Greek 2017 GDP growth to 2.15% from 2.8%. Fitch noted in its report on Thursday: “Some data suggest that the pace of the economic recovery has slowed in 2017. General government arrears with the private sector rose to €5 billion at end-February, and manufacturing PMIs indicate a contraction in activity in 1Q17, although industrial production has performed well.”
US Treasury Secretary Steven Mnuchin said on Tuesday that the US was continuing to encourage the IMF to discuss its participation in the Greek program.
Steven Mnuchin gave an interview to the Financial Times where he stated that the Trump Administration thinks that the Greek program “is primarily a European issue, although it is something we are monitoring because it is important to the world economy and world financial markets,” adding that he was hopeful a resolution to the “Greece situation” would come in the “near future”.
Treasury Secretary’s remarks on Greece follow comments made last week by a US Treasury official who said that the Trump Administration is “looking for the Europeans to help Greece to resolve its economic problems,” adding that the Administration thinks that “the IMF can play a supportive role” and will look at “any potential future agreement with an open mind.”
International Monetary Fund’s Christine Lagarde says that the Fund will participate in the Greek bailout program only if the debt is sustainable “in accordance with the IMF’s rules and on the basis of reasonable parameters”.
Lagarde, in an interview she gave to a number of European newspapers, also said that the Fund would like to see a 1.5% primary budget surplus in Greece. “In the long term, we believe that a 1.5% primary surplus is sensible given all that the economy has gone through, and given the Greeks’ capacity to reform”, IMF’s managing director said.
Here is the transcipt of Lagarde’s remarks on Greece:
QUESTION – You just made clear the IMF didn’t make any final decision on Greece. But did you make any progress in reconciling the two views, the European and IMF, regarding the long term fiscal surplus?
MS. LAGARDE – There are two aspects to it. One is short term, which is part of the ESM program and would be part of our own program– if we were to have one. And second, there is the longer-term fiscal path going forward, which will determine the debt sustainability analysis. In both areas, we need to converge as much as possible. But clearly, whatever the IMF would finance–if we were to join–would be on the basis of both the fiscal path and our debt sustainability analysis.
In the long term, we believe that a 1.5% primary surplus is sensible given all that the economy has gone through, and given the Greeks’ capacity to reform. If the Europeans determine differently, then we need to take that into account. But we cannot adopt unreasonable forecasts or build unjustifiable macroeconomic frameworks.
QUESTION – Is it conceivable that the IMF would not take part in the program? There are also grumbles on Capitol hill about the IMF lending too much money to Greece for too long. Do you have to balance these two dimensions?
MS. LAGARDE – It is plausible that the IMF would participate in a Greek program, as the Greek government has requested, if significant reforms are legislated to be implemented, and if debt is restructured to accommodate our debt sustainability analysis–conducted in accordance with the IMF’s rules. So, it is plausible. And we have seen progress on the first part.
The volume of our possible financial commitment is not going to be necessarily the most important contribution that we make–because the European Stability Mechanism is very well financed. It is more our discipline, our integrity, and our expertise generated over so many years that is actually a greater value to Europeans.
QUESTION – Without a debt restructure upfront, the IMF will not participate?
MS. LAGARDE – If the Greek debt is not sustainable in accordance with the IMF’s rules and on the basis of reasonable parameters, we will not participate in the program.
QUESTION – Is the staff of the IMF now convinced that the debt is not sustainable as it is?
MS. LAGARDE – Based on the debt sustainability analysis, we will determine how much debt needs to be restructured. But there is no question in our mind that a degree of debt restructuring is needed.
QUESTION – Why is the IMF taking even more time than the Eurogroup to decide on Greece?
MS. LAGARDE – Because we want ‘two legs’ for the program. We need solid reforms, and we are getting there: the team is going to be back in Greece to negotiate, fine-tune, put things on paper, so as to be a binding agreement between all the parties. So, we need solid reforms–and we need debt that is sustainable. And for that, restructuring will be needed. We do not have that yet, and the discussion on that needs to be completed.
Talks between Greek ministers and the heads of the institutions were concluded in the early morning hours on Wednesday without a breakthrough, although ‘good progress’ was made, as Eurogroup president Jeroen Dijsselbloem wrote on Twitter.
Meeting on #Greece with institutions and Greek government finished: we made good progress, talks will continue on Wednesday
As per Dijsselbloem’s tweet, the talks will continue on Wednesday afternoon via teleconference from the respective HQs.
‘Sensitive issues’ in pension, labour market and energy sector reforms continue to hinder the conclusion of a staff-level agreement. According to sources, the Greek government is negotiating for 500 million euros lower cuts in pensions, while is also asking for the cuts to come into effect primarily in 2020 and not in 2019 as the creditors are demanding.
Politically sensitive measures around the tax and the labour market reforms are preventing the Greek second review from conclusion, an EU official said on Tuesday.
The talks are virtually stuck over which year the 1.8 billion euros pension cuts will come into effect and whether collective bargaining will be reinstated at the end of the bailout program, according to a source with knowledge of the talks. It is understood that the Greek government has maintained that cuts should start in 2020, while the insitutions insist on a 2019 date.
The Syriza-led Greek government is facing fierce resistence from several MPs and central committee member in accepting measures that would minimize, if not annihilate, left-wing party’s chances at 2019 parliamentary elections. Party hardliners say that if pension cuts are imposed on January 2019, Syriza would face a debacle at the elections.
Greek PM and Syriza leader Alexis Tsipras has been reluctant to accept the creditors’ demands despite the uncertainty that is already taking a toll on the real economy. Greek manufacturing PMI took another dive in February as Markit Economics data suggested on Monday, while state arrears have increased by more than 500 million euros in February, Greece’s General Accounting office data show.
Greece faces a roughly 1.8 billion euros bond payment on April 20 and state’s ministries & utilities have recieved instructions from the government to hold back any unnecessary payments until further notice. Finance Ministry officials stress out that there will be no problem with the April 20 payments, since the Greek state maintains a more than 10 billion euros cash buffer but acknowledge that prolongueing the uncertainty over the second review conclusion is affecting state revenue.
Greek ministers return to Brussels
Finance Minister Tsakalotos, Labour Minister Achtsiòglou and Alternate Finance Minister Houliàrakis are back in Brussels in a new effort to reach a preliminary agreement by Friday’s Eurogroup meeting that would enable the return of the institutions’ staff back to Athens next week and the conclusion of a staff-level agreement before Easter holiday and IMF Spring Meetings.
Greek ministers’ return to Brussels ‘could be an important stepping stone, but no magic involved’, the EU official said.
Greek Manufacturing PMI further declined in March to 46.7 from 47.7 in February, Markit Economics reported on Monday. As Markit notes,
“Operating conditions in the Greek manufacturing sector deteriorated further during March. The downturn was driven by another sharp decrease in new orders, which in turn contributed to a further drop in output. As a result of lower production requirements, firms reduced their staffing numbers and input buying. Concurrently, margins continued to be squeezed amid further strong input cost inflation and a fall in average selling prices. Nevertheless, firms maintained a positive outlook with regard to output growth over the coming 12 months”.
Stalled bailout negotiations weigh on the economy
Markit’s Alex Gill said on the PMI data:
“March data signalled an ongoing downturn in the Greek manufacturing sector, as output and new orders continued to fall and at sharper rates. In turn, this led to a further drop in staffing numbers, thereby compounding the country’s stubbornly high level of unemployment. On a more positive note, firms remained confident that output would expand over the coming 12 months. A number of panellists predicted an improvement in economic conditions. Key to this would be a positive conclusion to the current bailout negotiations which could help to firm up client demand.”
Greece has reached an agreement with its lenders on key labour reforms, spending cuts and energy issues, moving closer to clinching a preliminary deal before a meeting of euro zone finance ministers on April 7, Reuters reports on Wednesday citing sources close to the talks.
Greece will cut pension spending by up to one percent of GDP in 2019, two officials told Reuters on condition of anonymity. Lowering the tax-free threshold to about 6,000 euros to save roughly another 1 percent of GDP has also been agreed, an EU official said.
On labour reforms, Greece will not be forced to liberalise mass layoffs further, as initially demanded by the IMF, two officials said. Collective bargaining, which was weakened as part of bailout reforms in 2012, is expected to be revived after the country’s current bailout programme expires in 2018.
Greece has also agreed to sell some of its main power utility PPC coal-fired plants as part of bailout reforms, two sources close to the talks said. One of the sources said that Greece will have to sell up to 40 percent of its coal-fired plants.
Bailout talks in Brussels between the Greek government and the institutions have ended late Thursday night without a major breakthrough that would enable the return of the institutions to Athens and the successful conclusion of a ‘staff-level agreement’.
An ESM spokesman said on Friday that ‘some’ progress has been made in Brussels talks and the institutions and the Greek government will continue the talks from their respective headquarters.
A Greek government official confirmed that ‘in person talks in Brussels have conluded’ and that the ‘two or three’ issues that remain unresolved is expected to be agreed ‘in the next few days’.
A source with direct knowledge of the talks said that main issues of disagreement are the reforms in labour market and the energy sector.
Greek PM Tsipras sent a letter to EU Council president Donald Tusk and EU Commission president Jean-Claude Jucker on Thursday urging EU leader to ‘respect’ the acquis communautaire on the labour market legislation. Greek officials warned on Thursday that Greece was not ready to sign on the Rome Declaration if there was no mention of ‘the need to protect social and workers’ rights in the EU’.