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Greece: where are we now?

The banks have reopened, but the Greek bailout numbers may not add up

In the Alice in Wonderland world of Greek bailout negotiations, nothing is quite as it seems.But, even by the terms of the tragicomedy into which the Greek drama has descended, the referendum on 5 July was bizarre. The resulting deal may have averted crisis. Or it may have stored up a bigger one to come. Our latest guide offers a few pointers.

1. The referendum question: ask the Oracle

The bailout package presented to the Greek people was no longer available – the European leaders had withdrawn it when Tsipras called the vote. The main question that voters were presented with – should we or shouldn’t we accept the current bailout – required a degree in linguistics to untangle.

The supplementary one – “can we afford the debt it leaves us with?” – even divides the biggest brains among Greece’s creditors: the IMF has since said that Greece can’t cope with the debt burden imposed by the bailout. If even the ECB and the IMF disagree, you wonder what chance the average Greek worker had of answering correctly.

2. The referendum answer: when ‘no’ means ‘yes’

No one really understood what a “no” vote meant. Each interested party went into the referendum with a different idea. Greek Prime Minister Alexis Tsipras, said that a “no” would strengthen his hand with creditors, increasing his chances of keeping Greece in the Euro. European leaders – those of France and Ital but not, explicitly, Germany – responded that a ‘no’ meant Grexit.

To the Greek people, it was a cry for softer bailout terms (without an exit from the Euro). But they got the opposite.

“I am confident that I will succeed,” said Mr Tsipras, returning to the negotiating table armed with the "no" result. Days later he had accepted an even harsher bailout than the one that Greek people had just said no to. Curiouser and curiouser.

For this heads-I-win-tails-you-lose result they can probably blame Mr Tsipras, who by calling for the referendum both turned his back on the existing deal and extinguished what was left of the goodwill from his European negotiating partners.

But by then, it seems, the Greek people were exhausted: as firebombs landed outside, the Greek Parliament agreed to the latest offer on15 July. Seven out of ten Greeks said they were right to do so.

3. What Greece gets

Between €82 billion ($90 billion) and €86 billion over three years, averting the spectre of default on €3.5 billion-worth ($3.9 billion) of bond payments due to the ECB on 20 July.

4. What Greece gives

When, on 15 July, the Greek parliament approved a bill containing the first set of reforms required by the new bailout package they agreed to a number of measures.

1) Increase VAT, or at least include more goods and services in the main 23 per cent rate.

ii) Change the pension system. In practice this will increase health charges and end a top-up payment enjoyed by the poorest pensioners.

iii) Cut the cost of running the government – which means sacking most of the civil servants employed since the Tsipras government was elected in January.

iv) Insure the legal independence of the Greek statistics office (avoiding the sort of number-fudging that saw Greece’s economy imploding under the noses of the Eurozone partners while the reported numbers showed a clean bill of health).

v) Widescale privatisation of Greece’s large public firms. This, it is hoped, will raise €50bn, €25bn of which will go to recapitalising Greece’sbanks€25bn of which will be divided equally to repay debt and invest in the Greek economy.

vi) “Quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets”.This unnecessarily labyrinthine language – increasingly beloved of Eurozone bailout drafts– can be simplified thus: "if the Greek government collects less than hoped in taxes then it automatically pledges to spend less."

5. The legacy

When it comes to plausibility points (v) and (vi) have attracted the biggest groans.

The privatisation programme is fantasy. “Fat chance,” The Economist wrote on 16 July of the prospect that it would raise €50bn. The €50bn target dates from 2011. In the intervening years the value of the Greek stock market, a measure of private demand for these public assets, has fallen by 40 per cent. In the same time the money from privatisation has been a paltry €3bn.

Common sense appears to support point (vi)  – less money coming in should mean less money going out. But economics typically relies on the type of financial sleight of hand that rewards governments who spend more than they can afford today, with more sustainable growth tomorrow.

But In fact, cutting spending when the economy underperforms (the cause of lower than expected tax revenues) is a dangerous game. In the UK, arguably Europe’s poster child for using temperate austerity to repair a budget deficit (when the government spends more than it collects in taxes), the opposite mechanism is in place. Chancellor George Osborne’s latest fiscal rules suspend the requirement to run a budget surplus if growth dips below 1 per cent.

Hugo specialises in business and financial themes, writing and/or editing for a number of publications including Asian investor magazine, Global Investor Magazine and Institutional Investor.

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