July 13, 2015
Not Yet a Done Deal with Greece
Atlantic Council’s Andrea Montanino sees onerous limitations on Greek sovereignty
By Ashish Kumar Sen
Montanino said it is premature to declare that marathon negotiations over the weekend had produced an agreement that prevents Greece’s exit from the Eurozone—a Grexit.
“There is not an agreement as yet. They have basically reached an agreement that if the Greek government puts forward several tough reforms by Wednesday, in particular on pensions and on the tax system, then the finance ministers have the mandate to negotiate a three-year program,” Montanino, Director, Global Business and Economics Program at the Atlantic Council.
“But the statement is very clear that the mandate to negotiate doesn’t mean an agreement will be reached 100 percent,” added Montanino, a former Executive Director of the International Monetary Fund (IMF) representing the governments of Albania, Greece, Italy, Malta, Portugal, and San Marino.
Montanino said the deal puts severe limitations on Greek sovereignty by giving the troika—the International Monetary Fund, European Central Bank, and European Commission—the last word on privatization, and by mandating that these institutions approve the text of draft legislation proposed by the Greek government before it is sent to Parliament for a vote.
“I don’t know how long the Greek government can stay in power with such limitations,” he said.
Following grueling negotiations with its creditors that lasted through the weekend, Greece agreed to pass legislation on controversial economic reforms, including reform of the value-added tax (VAT) system and overhauling pensions, by July 15.
Athens has agreed to sell off state assets worth €50 billion and put the money in a trust fund managed by Greece, but overseen by the troika. Half the fund will be used to recapitalize Greek banks. The remaining €25 billion will be used to pay down Greek debts.
The deal puts Athens on track to securing a third bailout, that could be worth up to €86 billion, which would come mainly from the European Stability Mechanism (ESM), the Eurozone bailout fund.
Negotiations on the ESM bailout will begin only after the plan is approved by the parliaments of Finland, Germany, and Greece.
While Greece agreed to the stiff terms, its creditors did not agree to the so-called “haircut”—cutting of the Greek debt—that Athens had sought.
Andrea Montanino spoke in an interview with the New Atlanticist’s Ashish Kumar Sen. Here are excerpts of that interview:
Q: What are the terms of the deal Greece has agreed to in order to secure a third bailout?
Montanino: There is not an agreement as yet. They have basically reached an agreement that if the Greek government puts forward several tough reforms by Wednesday, in particular on pensions and on the tax system, then the finance ministers have the mandate to negotiate a three-year program.
But the statement is very clear that the mandate to negotiate doesn’t mean an agreement will be reached 100 percent. We are now in a situation where, as always in such cases, there is prior action to be taken. Greece has to take this action in two days. After that there will be a negotiation on the program.
I see a big challenge for the Greek government. There is a huge limitation on sovereignty in the years ahead. There are two elements. The first is about privatization. Privatization will be managed by an independent body and not by the government itself. This independent body will be managed by Greek authorities, but under the supervision of the troika. This is quite strange because the government should handle public assets.
Now, if the Greek government was to sell an airport, first of all they would have to go through an independent body, second the international organizations will have a role in deciding how and probably to whom to sell the asset. I have never seen this before.
The second limitation on sovereignty is that if the government wants to propose a draft law to the Parliament this has to first be agreed to by the institutions. So you’re saying the government does not have the right to go to its own Parliament and propose laws. In practice, this has happened before, not just with Greece but also with any IMF program. But I have never seen this stated so explicitly.
I don’t know how long the Greek government can stay in power with such limitations.
Q: The Greek Parliament has a Wednesday deadline to approve reform legislation.
Montanino: The government basically has one day to put forward the legislation to the Parliament and the Parliament has one day to approve it. The timing is strict. The reason is that the real deadline is July 20 when Greece has to refund the European Central Bank.
Q: Greece defaulted on its payment to the IMF. Will Greece be able to make its payment to the ECB?
Montanino: There are two ways Greece can make this payment. The first, as stated in the letter, is that after July 15 there is a negotiation of the program, the program is approved, and then the European institutions make the disbursement allowing Greece to make the payment.
Second, I think the Europeans will find a way to avoid a default over the ECB if there is not sufficient time.
Q: Is it premature to say a Grexit has been avoided?
Montanino: Absolutely, yes. It is premature for two reasons. We don’t know how things will end up this week. We have seen in the last two or three weeks how things can change abruptly and take a direction that is completely the opposite of the first one.
Second, I am not sure the Greek economy will be viable even with this third financial aid package because Greece is in a deep recession, its banking system has collapsed, and maybe in six months we will discover that even with this package the country is still not viable.
Q: Are the terms agreed to enough to persuade the European Central Bank to provide more emergency cash to Greece?
Montanino: I don’t think they are going to do anything until the end of this week, until a deal is reached. If a deal is reached, I think the ECB will do its part. It is also true that as part of the deal there are €25 billion for bank recapitalization, which means that the banking system will be a little bit stronger and therefore the ECB can provide emergency liquidity.
Q: Have the creditors been too harsh?
Montanino: Clearly the agreement is very harsh. There are limitations on sovereignty, there are measures to be taken in two days, but the conditions of Greece are really very critical and much worse now than they were three weeks ago.
We lost four months discussing this Greece deal, and we lost the last two weeks with the Greek referendum [on July 5]. The situation worsened over the last two weeks. With the condition in which Greece is now that is the only thing that you can do.
I don’t know whether this will work, but clearly you either accept the collapse of the Greek economy and its banking system, or you have to put a deal like this on the table.
Q: In what ways is the plan Tsipras has accepted different from what his government rejected two weeks ago?
Montanino: The conditions are harsher. They are tougher. The proposal rejected two weeks ago was difficult for Greece, but now it is even more difficult. We need to wait until Wednesday to see the details of the deal.
The [plan] clearly goes in the opposite direction of the referendum because the “no” vote was a clear no to the creditors’ tough line. We are now in front of the same line or even a tougher one.
Q: After winning a referendum in which Greek voters rejected more austerity, Tsipras went ahead and accepted more austerity. What implication is this likely to have on his government and his credibility among the Greek people?
Montanino: This is a big challenge for him. I don’t know whether Tsipras will be able to stay in power. Maybe he will manage to last through this week. In the future, I don’t know whether he will be able to stay because he will have very strict monitoring and very strict control by the creditors, which will weaken his position unless the markets become positive toward Greece.
If the economy starts getting better and there is confidence in Greece it will show that the agreement is positive for Greece. But if there is a delay in seeing a positive response it will create problems for Tsipras.
Q: What kind of timeframe are we talking about to see the real benefits of a deal?
Montanino: In terms of confidence, it can happen in a few days. Stock markets can start growing. But in terms of the real economy, it needs months or sometimes years because you need to have foreign investors coming into the country. It’s not just a matter of sentiment, it’s a matter of real conditions.
You need a good tax administration in place in order to start collecting taxes properly. And in order to do so you need months or years. Unfortunately, the road ahead is very long for Greece.
Q: Following the July 5 referendum there was a sense that the creditors would prefer to negotiate with anyone but Tsipras. Now Tsipras has agreed to these tough conditions that could weaken his government. How likely is it that a future Greek government would take a tougher line?
Montanino: There are three scenarios. First, Tsipras remains in charge and he manages to convince the Greek Parliament and the Greek people that this is a good deal and works hard to make this a success. This is probably the best scenario at this stage.
A second scenario is that Tsipras has to resign in a few months and you have a technocrat government with a coalition and they deal with the creditors.
A third scenario is that there are elections and even more radical parties win. In this case it will be very, very difficult for the creditors. In that case there will be a collapse of the program. They will go off track and a Grexit will be the only likely scenario.
Q: In this process you had the French and the Italians being sympathetic toward Greece on one side versus the Germans who pushed for tougher measures. Is this likely to have any impact on the European project?
Montanino: At the end of the day, the Europeans were quite united on the need for an agreement. The French were able to take leadership in the last forty-eight hours. They really worked for an agreement and they tried to help the Greeks put forward a proposal that was acceptable to the others.
The way I see the French working was to help the Greeks saying, “We want you to remain part of our family and we will help you to understand how you can remain part of this group.”
The Germans and the Greeks didn’t trust each other so there was a need for a third party, and probably the French played this role.
Ashish Kumar Sen is a staff writer at the Atlantic Council.