Analysis: Time running out on Athens' troika two-step

Each time, the story is the same: Greece makes budget commitments, its creditors warn it is in danger of missing them, Athens promises a renewed effort, and just in time, everyone agrees the targets were met.

Over the 17 months since Greece was granted 110 billion euros of emergency loans by the IMF and European Union, five loan tranches have been paid out despite Athens' patchy success in delivering on its goals.

The 6th tranche is due in mid-October and again looks likely to be paid, if only because the impact on the euro zone and global economy is too dangerously unquantifiable if not. Greece is falling far short on objectives but will again get its money.

The question is how long the charade of the European Commission, European Central Bank and IMF turning a half-blind eye to Athens' backsliding can go on before the troika's inspectors decide enough is enough -- that compromising on their integrity to allow Greece to stumble on just won't do.

There is already a clear sense in Brussels and beyond that the 7th tranche may be a tranche too far, that the gap between EU expectation and the reality in Greece will be too great by then for the payment to be made in good conscience.

That would mean Athens pushed to default, unless changes to the euro zone bailout fund, set to be finalized in the next month, make it possible to stave off the threat for several months longer by providing quick funds to Greece.

Such changes -- and the possibility of euro zone states finalizing their second, 109 billion euro bailout for Athens -- may provide a lifeline, but Greece can't rely on them happening.

It has to try to meet its commitments first, including raising 5 billion euros from privatizations this year and cutting its budget deficit to 7.6 percent from 10.4 percent of GDP. Neither looks anywhere near likely to be met.

Only in the past few days have concrete steps been taken to implement the spending cuts and tax measures demanded by the European Commission, the European Central Bank and the IMF -- the troika of inspectors who must sign off on its accounts before payment of the 6th tranche of 8 billion euros.

The troika has made it clear it is not happy with the backsliding, a position reinforced by the EU's economic and monetary affairs commissioner, Olli Rehn, on Thursday.

"Greece has not implemented fully the measures to strengthen public finances and improve the economy's competitiveness, which the EU and the IMF required as a condition for financial assistance," Rehn said in a speech in Washington.

"The deficit reduction is not proceeding as fast as projected earlier."

For Rehn, it was a stern admonishment and another sign that the game may soon be up for Athens. The troika needs Greece to succeed, but not at any cost.

"They have to put the best possible gloss on the situation because things are not looking good," Hugo Brady of the Center for European Reform said of the troika's dilemma.

"The alternative is the truth, and at this stage that would be to acknowledge that Greece is heading for default."

"A Tranche Too Far?"

Greece's difficulty with meeting its targets stems in part from what one official has described as a recurring clash between the troika representatives and Greek Finance Minister Evangelos Venizelos, who frequently haggles over goals.

Greece had promised lenders it would conclude five privatisation deals by the end of September. The troika set a revenue target of 1.7 billion euros as a condition for receiving the next tranche of aid. But only one deal, expected to generate about half what is needed, looks set to be completed on time.

Other goals, such as shrinking the public sector, where one in seven Greeks is employed, have fallen flat, and there has been a tendency to rely on one-off tax measures to plug budget gaps rather than structural changes to the tax system.

But the responsibility does not lie solely with Athens.

"The problem with the goals given to Greece by the troika has been that they are not measurable," said one EU official, who said that although Greece's leaders were well intentioned, a disorderly civil service made it difficult to keep promises.

"If you look at the Italian civil service, there are some bright people there. If you need to reach someone, you just pick up the phone. They will carry out what has been agreed. That's not the case in Greece," the official said.

In negotiations over the payment of the sixth tranche, the troika has sought to change the relationship, demanding that Greece accelerate layoffs in its public service. Publicly the inspectors presented a much sterner, more demanding face.

In response, Athens announced this week that it would place 30,000 public-sector staff in a holding queue for redundancy, cutting their pay by 40 percent while they wait to be fired.

It will also reduce pensions by 20 percent, lower the threshold for paying income tax and extend a property tax.

But still there is the sense that it is not enough.

If the troika were to push ahead and approve the 7th tranche, a 5 billion euro payment due in December, it would run the risk of being seen in the same light as the previous Greek government, which dressed up its economic performance with false statistics, a deceit that led directly to the debt crisis.

"The perception is that you need to make the Greeks toe the line," said John Fitzgerald of the Economic and Social Research Institute in Dublin. "We just need to get it sorted so that it doesn't destabilizes things. Even if it requires treating them in a more generous fashion, it's in our own interest."

Any sense in financial markets that inspectors are ignoring Athens' shortcomings to buy more time will further undermine confidence in the region's ability to handle the crisis.

EU leaders agreed on July 21 to a new, 109-billion-euro bailout of Greece that would replace the existing program. If that deal is finalized in the coming weeks, Athens could get a new lifeline and might avoid the tranche-to-tranche pressure.

But otherwise questions are immediately going to be asked about Greece's ability fully to meet its targets and whether it makes sense for euro zone states to go on lending money to a country that is increasingly unlikely to be able to pay it back.

Some analysts are predicting a Greek default as soon as November or December -- i.e. the sixth tranche will be paid but the appetite won't be there to provide the seventh.

Underlining those concerns, the Greek government had to deny on Friday press reports that it was considering the possibility of a default on its debt.

"It's apocalyptic times," said Brady at the Center for European Reform. "We haven't had a big ruction in the last couple of weeks and yet the politics seem to be coming undone like a fraying rope. No one knows what the event is going to be that kicks it all off, with Greece lurching toward default."

[Source: By Luke Baker and John O'Donnell, Reuters, Brussels, 23Sep11]

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