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INTERVIEW

Jens Bastian: Damage repair mode is still in operation from the catastrophic 8 months of 2015

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Economist and  former member of the EU Commissions Task Force for Greece Jens Bastian, talks to Capital.gr about the underpinnings of the negotiation for the review, the prospects of the new bailout, and the mistakes made both from the greek authorities and the creditors.

 

Interviewed by Dimitris Bounias

 

 

 

Much like every other time, this review is presented as -maybe- a turning point towards a supposed beginning of a recovery. Is it any different this time, this particular review? Or is it more of the same?


In some ways it is more of the same. For example in terms of how long it takes. Just like previous reviews. Also, it is much of the same in terms of how acrimonious it is. How the different parties involved have largely differing views on key issues and how difficult it is to bridge these towards a compromise.


But there are also some new things which make this review different. One is that it is the first review in the third program where the constitution of those involved is different. Because while the IMF is part of the review process, for the first time the Fund has not joined a Greek program as a financial contributor.

Moreover, the European Stability Mechanism (ESM) is now included, hence the change in terminology from the troika to the quartet. You have a reshuffling of the creditor community involved in the review process. This enlargement also adds to the complexity of the process and why it is so time consuming. You need a much higher level of coordination and consensus building among a larger number of institutions sitting at the table.

But what you also see in this review is that it is one that started months ago with the explicit acknowledgement by the Greek Prime Minister that he does not believe in the policies that are subject to the review. This in many ways puts a cloud over the whole review process because you are essentially talking with somebody who is telling you: I am doing this but I am not convinced that I should be doing it and hence our interpretation of its efficiency differs completely.

Finally this review process in the later stages has introduced a new, unsettling element, namely that you now explicitly operate, not only with leaks like we had in the pasts (non papers and documents leaked to the press), but what we now have witnessed is deliberate spying on confidential discussions among IMF officials. And to use the data recorded - whoever put it to the public - to make it part of the review process, thats new. That addresses some rather uncomfortable questions in terms of secure telephone lines, in terms of whos spying on whom and how the participants can trust each other.

We had a huge trust debate last year with regard to when for example finance minister Varoufakis leaked a taped conversation of a Eurogroup meeting and was proud of having done that. That created an enormous debate about trust among colleagues. This new episode now adds to this level of re-establishing trust and how easy it is to break it again. The just concluded spring meetings of the IMF in Washington illustrated how arduous this process is. A breakthrough on the Greek program review was unlikely in Washington as the negotiations continue to only make slow progress.

What do you think Chancellor Merkel and the IMF Managing Director Lagarde talked about in their recent Berlin meeting?

I was not surprised that following the IMF Wikileaks both immediately met and sought to clarify some rather uncomfortable issues. The statement from the Chancellor was vintage Merkel in terms of emphasizing the continuation of the implementation of the reforms based on the third review. But she also categorically argued against debt relief. No surprise there, rather the harshness with which she said it, "this is out of the question". Otherwise I think what they both had to talk about is preparing a roadmap on how to proceed in light of the damage done. Because important issues await resolution, e.g. the meeting of the Eurogroup of finance ministers on April 22nd in Amsterdam where the Greek issue will be top of the agenda.

In the leaked teleconference dialog the IMF explicitly recognized by the IMF the difficulties of having a functioning negotiating process between the creditors and Greece from mid-May until end of June because of the EU referendum in Britain. This means that for a 6 to 8 weeks period you can hardly negotiate the complexities of debt relief, provided that the review process has been concluded. The European Commission will be focused on completely different issues. The more polls emerge indicating the real possibility of Brexit then the ECB would have to go into plan B mode in terms of contingency risks. It is going to be very difficult to address substantial, controversial policy issues during those 6 to 8 weeks. I think Chancellor Merkel and Ms Lagarde were trying to agree on what issues will be on and what topics off the table during this critical period of time.

How precarious is the IMFs position in the program? What is it that dictates the presence the IMF?

It is a misconception to only focus on the German side wanting the IMF to stay on board. In Germany it is not only Chancellor Merkel. She was the one who initially brought the IMF on board in 2010. She and finance minister Schäuble adamantly fought against President Sarkozy of France who was against it, or the then ECB president Trichet who was also against including the IMF. Merkel and Schäuble pushed the IMF on board and have ever since argued the need for the Fund to stay.

Initially that need was justified because of the IMFs technical expertise and the enforcement capacity. It was argued in 2010 that the euro area lacked the institutional architecture and needed the IMF. Today the IMF is kept on board for reasons which sound rather different. If the IMF is not included, the German Bundestag would not release any further financial assistance. Because the opposition to the third program is so strong in Germany, not only among conservative MPs but also deep in the SPD, even among parts of the Greens. So it is rather an issue today that the IMF is needed not so much for the Greek program, it is for the Germans to be able to continue to keep the third program alive. That is a role-reversal for the justification of including  the IMF in the third program.

But Germany is not alone with this reasoning. The US also wants the IMF to remain on board. The US treasury secretary Jack Lew has just again emphasized at the spring meetings of the IMF in Washington how important it is that the IMF stays on course. The US administration supports the IMF’s advocacy of debt relief for Greece. Achieving Greek debt sustainability in the long run is not about a formula, the mathematics of debt relief; it is essentially about hard core politics inside the creditor community.

Equally, the parliaments in Finland, the Netherlands, Slovakia and the Baltics have always emphasized: "we are only willing to give a green light to release further financial assistance for Greece if the IMF is on board". Hence, I wouldnt focus only on Germany as the default villain in favor of the IMF participation. That is misleading, at times deliberately.

Finally, in practical terms, the ESM who is the current financing organization in the third program, can only release funds to Greece if there is a unanimous decision of the Eurogroup of finance ministers. Hence every country has a say in the release of the tranches. And that will also depend to what degree they consider the IMF to be on board or not.

Mr. Dombrovskis said that more spending cuts are needed and less tax raises. As a former member of the Task Force for Greece of the European Commission you were part of the implementation process. Wouldnt the troika ask for no more tax raises if they felt that way? Is it the Greek government that decides to raise the taxes? Is there more space for spending cuts?

The decision about various tax increases with regards to the third program was a debate that went into the late nights of these dramatic moments of July and August last year. It was not only the Greek government who focused on, for example, the possibility of corporate tax increases - or higher social security contributions from pensioners to health care. These were also tax related demands that members of the troika made. The difference is that the troika formally argues "you can decide how high the increase should be" or "you may fine tune them”.

It is wrong to say "the troika has obliged us to do this". It is equally wrong to say that it is completely in the sovereign decision of the Greek government to do this. It is the outcome of a very delicate and difficult compromise which in my view has not worked in practice. These tax increases that are now part of the third program as prior actions are in my view counterproductive for a real economy that has been in recession for seven years.

I still see among members of the troika / quartet a far too strong emphasis on spending cuts, potential tax increases in selected areas and a far less pro-active public advocacy of investment. In terms of saying, for example, we now have the Juncker program of the European Commission up and running. The Juncker program has been welcomed in Greece. For the first time, the third program has an investment component, a substantial one. Over 200 projects have been already approved in the context of the Juncker program in the EU. How many of them in Greece? Zero to date!

For me this is the debate that Mr Dombrovskis should encourage the Greek authorities to have, instead of focusing on Greece reaching a primary surplus target of 3.5% of GDP in 2018. He should be asking the Greek authorities the following: Why are you so late to the game in implementing the Juncker investment program? Why cant we showcase 1,2,3 approved pilot projects of the Juncker plan for Greece? Thats potentially a success story which this country desperately needs. For me this is the debate we should be having, not about further spending cuts which in so many areas of fiscal policy making have reached the bone.

Further tax increases are a strangulation on the real economy which barely has the opportunity to breathe. You do not inject oxygen into a real economy by further tax increases as we have continuously witnessed during the past 6 years. We should rather focus on two other fiscal issues. One is broadening the tax basis in Greece, i.e. effective, transparent burden sharing. Greece currently exempts 55 percent of all households from paying personal income tax! Greece’s minimum threshold for paying income tax is currently €9,500 per year, higher than in Germany and many other countries in the Eurozone

The other topic concerns the introduction of tax credits for households and businesses. For example, a tax administration that provides earmarked tax credits to those who pay their taxes on time and in full. A special version of tax credits is already being applied in favor of Greek banks when they make use of so-called deferred tax assets (DTA). Why should they be the only ones to benefit from such tax credit options? That is a debate that I miss since years in the narrative of taxation and fiscal policy making between the quartet and the Greek authorities, irrespective of who is in government.

However, they are only discussing how to cut further. Look at the pension reform. Is the pension reform still the biggest sticking point in the negotiation? Can it be fixed?

I was shocked seeing, when the third program was agreed, that the first reform that was required within almost two weeks, was a pension reform. No country on earth, with these deep-seated structural problems, and on top of that with a crisis that has taken 25% of GDP away, can reform a pension system within two weeks. It is ludicrous to assume that you can solve this problem by pushing policymakers in parliament into a fast track solution. I thought that was counterproductive. It invites mistakes in the reform details which you have to correct later.

If you take, like the quartet, a quantitative approach to program execution that implies focusing on numeric targets: e.g. "such and such cuts plus such and such tax increases provide for a surplus by 2000-something". We know where this kind of reasoning ended with the erroneous fiscal multipliers of the IMF in 2011. With such a conceptual focus the idea that you have to further cut pensions is a logical conclusion to an - in my view - misguided numeric approach.

The pension issue has three characteristics: The focus cannot be exclusively on cuts anymore. The only cuts that I would support is to radically curtail or even abolish early retirement options. But thats not the controversial issue in the pension reform debate. In my view, we must move away from the reduction target and instead provide sustainable solutions to three questions:

1) Isnt the pension system in Greece one of the reform areas in the past 7 years which is characterized by so many reforms that there is a growing indigestion in the system? Why dont we rather say less is more in terms of "first let the reforms that have arrived gain ground and mature".
2) You can reform the pension system as much as you like but if you have an unemployment rate of 25% no amount of pension reform will get you anywhere. The best pension reform that Greece needs right now is labor market reform. It is to create jobs because you thereby create social security contributors who invest into a system that is currently in a structural deficit.
3) We need a much clearer focus on social security contribution evasion by individuals and businesses. It still happens far too often. We need a digital system to cross-register among personal income taxes, wages and salaries as well as social security contributions. With such cross-checking we would be able to identify those who systematically avoid paying their contributions.

You said that Mr. Tsipras is called to implement a program he does not believe in. Is it a good program, one that a reform-minded individual should believe in?

In my view the third program is already a reflection of the fact that the first two programs have failed. And that the reasons that contributed to that failure have not been sufficiently recognized in the third program. The one part that was necessary and that was implemented in the third program is the recapitalization of Greek banks.

But if I look at other areas, for example the privatization program, the contradictions are obvious. On the one hand the government must reconfigure the privatization fund (HRADF). On the other hand, the minister of the economy Mr. Stathakis publicly stated recently in Berlin that the privatization revenue target for 2016 will not be met. This underperformance and repeated target revisions constitutes a continuous line from the first to the second to the third program. This begs the question: how many policy areas do you have where you ask yourself: "have we not learned from the lessons of past programmes?". One would be: "dont micromanage a real economy". Secondly, reconsider the mix between taxation, spending cuts and public investment in favor of the latter by creating additional fiscal space. Greece is the only country that has required three programs. What does that tell you about previous program efficiency? What does that tell you about the effectiveness of program conditionality? And last what does that tell you about the limits of domestic ownership of the program?

My conclusion is that the third program will again underperform. For what reason will it underperform? Theres a stark reality in these three programs that despite major fiscal adjustment efforts by Greece over the course of the past six years, we have not witnessed, with a very small exception in 2014, a recovery of the real economy. Put otherwise, one of the initial objectives of the first program in 2010 was that the Greek economy would hit the ground running by 2013, based on optimistic assumptions of GDP growth, an export-led recovery, declining unemployment, private sector investment, rising tax revenue and so on. But in reality this roadmap has not materialized. Instead, the Greek real economy has fallen into a hole and the hole is getting deeper.

What conclusion do you draw from such a dire assessment? Is it a reflection of the failure of the entire programs? I wouldnt say that. Its not an argument against the need for fiscal adjustment and structural reforms. Rather it makes the case for a different mix of policies in Greece that can support the recovery if and when it materializes. At present private sector market forces in Greece are hardly in a position to contribute to this recovery. This is most clearly illustrated by the state of play of Greek banks and the absence of a lending recovery to the private sector, in particular small and medium-sized businesses.

In my view you need public policy making capacity to kick start that recovery. You need to introduce investment components into the third program and establish fiscal space for the government. The Juncker program is such an investment component which recognizes that under current circumstances you cannot expect the private sector to do the heavy lifting in Greece. Instead, third party public policy intervention must be possible, from inside Greece and at the European level. Put otherwise, public policy alternatives must be part of that process or even lead the process.

Why do you think that is? Whose fault it is? Just a few weeks back, Mr. Katainen invited businesses to go straight to Brussels with their investment plans. What is the EIBs role in this?

The EIB is already playing a huge role in Greece. It is the single largest public investor in Greece over the course of the past 10 years. It has exposure to Greece like no other country in the euro area. The president of the EIB Mr. Hoyer has repeatedly said "we are willing to do more". But for this we need marketable, transparent project proposals”. If the reason for the current absence of approved Greek projects in the Juncker investment program is that the projects being submitted are not good enough, that would be a rather devastating assessment.

I think it is rather a reflection of the continuous lag of administrative efficiency in various Greek ministries. The changes being implemented by the current government in terms of personnel policy leads to timely delays and loss of professional expertise. For example, the Tsipras government has hardly recruited Greeks working in different European institutions into ministries. The personnel changes of the past 16 months seldom include highly experienced, trained, committed technocrats who know the ropes, the ins and outs, the does and donts of European project management and the hallways of Brussels. But these are the Greek experts you need, because as Mr. Katainen says "the door is open". But we need people that can present a viable project in English, who have experience in financial project management and who can deliver transparent reporting on time.
With the refugee crisis we saw how the government struggled for months last year to absorbe available special EU funding because it lacked the personnel and the administrative capacity to kick start such funding options based on coherent project management and the timely cooperation with mayors, in particular on islands like Lesbos, Chios and Samos.

The Commission says we could have exited the program in 2014. That we were almost recovering and that elections and Mr. Tsipras ruined everything. Do you think Greece would be in a different situation now if elections had not happened and Syriza was not in power?

I think Greece would definitely be in a different situation if the early elections of January 2015 wouldnt have taken place. But this development is as much the responsibility of Mr. Tsipras as it was the result of the behavior of Mr. Samaras. The responsibility for that fundamental policy mistake to force early elections lies not only with Mr. Tsipras. Greece would be in a different situation today because we would not have experienced the agonizing period of January to August 2015. The damage repair mode is still in operation from these catastrophic 8 months. We would not have had to introduce capital controls. We would not have had a deposit outflow of more than 36 billion euros from the Greek banking sector. In my view Greece would have been in a position - as it had started in April 2014 - to continue returning to international capital markets. Greece would also have been part of the QE program of the ECB. Instead it is today the only euro area member being left out. Finally, we would not have needed a fourth banking recapitalization since 2009.

So you have here key structural elements that prevented a small recovery that was starting to  take place to continue. But let me emphasize that I dont want to oversell the word “recovery” here. The recovery that is associated with the last months of Mr. Samaras in 2014 was a very selective economic recovery, e.g. in sectors like tourism. But there was no recovery in construction, the retail sector, no bank lending recovery. The big majority of Greek citizens didnt feel any recovery, for example in terms of disposable income or improved labor market prospects, in particular for young citizens. But I would emphasize that what had started to spruce would have had a better chance of surviving had the early elections been avoided in January 2015.

Investors put money in the country every time they thought a recovery was coming and every time they got burned. What are the chances that they would trust Greece once again?

It is still challenging to present a credible and sustainable investment story about Greece. It doesnt help at all that you again have speculation from members of the government but also from the leader of the opposition calling for early elections. Thats the last thing that an investor - domestic or international - wants right now in Greece.
Equally, the level of investment in Greece shouldnt be underestimated. There are promising sectors and companies, for example the port of Piraeus, transport and logistics or companies like OTE, Follie Follie, Jumbo, Aegean that have an international business profile. Despite very difficult conditions some of them even have the capacity to place corporate bonds on international capital markets.

Most of the foreign investment that Greece receives today is either in tourism or as part of certain program compliance requirements. But it is the investment that takes place outside of the third program which is more important. Here the wrong signals are being sent by the government. If you are an Eldorado representative from Canada the experience that you have had with different Greek administrations over the course of the past 20 months is anything but encouraging. And until recently the experience that the Greek-German Fraport consortium had concerning leasing 14 regional airports was equally frustrating until the deal was finally concluded.

There are new investors coming to Greece, institutional investors like the EBRD and the IFC. That is a welcome development. But the Greek banking sector - the 4 largest lenders - is now majority owned by hedge funds. That is unique in the euro area. I am concerned about how hedge funds try to exercise influence, for example in the appointment of board members. Activist investors like hedge funds in the USA are very aggressive and difficult to monitor. If they behave like that with Greek banks, this will become a very challenging situation. We have to see in practice where that will lead in terms of the operational capacity of Greek banks and their strategic outlook.

Many of these hedge funds have in the past 4 years repeatedly invested in Greek banks and now have huge paper losses on their balance sheets. But they are prepared to come back because they have a very different risk profile, deep financial pockets and they consider the possibility that if recovery takes place in Greece, one of the leading sectors will be domestic banking. I think many of them are not investing so much in Greek banks because of the recovery potential on the asset side of the balance sheet. They are rather looking at the liability side of banks’ balance sheets, e.g. the recovery potential of non-performing loans (NPLs).

How are the NPLs going to be resolved?


It is important that the NPL issue is now finally on the agenda. It arrives late in the day but it needs to be addressed. From the Greek authorities, the domestic banks, but also from the quartet’s side. Looming behind the intricate legal details of NPL resolution is a more profound issue of financial sector innovation in Greece. The challenge is the following: are you prepared in Greece, under a SYRIZA-led government, to have dedicated funds operate NPLs and sell them at a low price? Put otherwise, inviting so-called vulture funds and asset management firms who are specialized in the grouping of NPLs and identifying potential buyers. But these buyers are very aggressive in terms of their negotiating tactics and their willingness to buy and package NPLs at a very low price. Are you prepared to have these kind of financial institutions enter the Greek market? In my view, yes. But it would be a remarkable transition.

If Syriza stays…


Yes, if Syriza stays, but also under any other government. It would re-arrange the field of what constitutes different forms of financial sector investment in Greece. The NPL challenge also needs to address another issue we cannot ignore and that concerns so-called strategic defaulters. Strategic defaulters take advantage of two issues in the NPL saga. 1) The legal confusion that exists in Greece in terms of NPL resolution, and 2) the judicial process, i.e. the drawn out decision making procedure until a court ruling is final.


Under these adverse circumstances you need much better cooperation between Greek banks and financial authorities with their counterparts in other countries. A strategic defaulter that at the same time has 3-4 bank accounts in other countries or who has recently bought a flat in central Berlin, but doesnt pay back his mortgage in Greece, thats a matter of international financial cooperation. The data is available and it needs to be shared. The Greek Central Bank says strategic defaulters are 20% of total NPLs. There are banking sources telling me that the level is closer to 40%. The substance of NPLs cant be resolved if you dont address this major problem.

Do you think Greece can turn the refugee crisis into an opportunity?


The experience of the past 6 years suggests that Greece is not very good at turning a crisis into an opportunity. Frequently it has been the opposite way, turning opportunity into crisis. It is rather delicate to claim a humanitarian crisis can be turned into an opportunity. You are dealing with many people whose reasons for coming to Greece include fear for their life. One should therefore be careful with such terminology. 


At the political level there is an absolute need to identify two interrelated issues: 1) In the refugee crisis Greece can regain trust with its European partners if it cooperates in substance with Turkey. That would send a signal that cooperation on a very complex policy issue is possible between Greece and Turkey like never before. That would be noticed in Berlin, Brussels and in other countries. 2) The crisis cannot be seen in isolation from Greeces economic and sovereign debt crisis. The interesting thing that came out of the IMF Wikileaks and the spring meetings in Washington is the following: For the first time the IMF links the refugee crisis with future debt relief negotiations. For me that is the real political opportunity to address in the coming months.

*Jens Bastian was Born, in Germany in 1960. He has been living in Greece since 1998, He worked for eight years at a private Greek bank, was a member of the Task Force for Greece of the European Commission between 2011 and 2013. Nowadays he works as an independent economic and financial sector consultant.

 

 

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