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Victoria Mindova

Greece is once again preparing for another austerity package before the arrival of the supervisory Troika of the International Monetary Fund, the European Central Bank and the European Commission. A new reduction of pensions by at least 20% will be introduced for the next two years, 40,000 public sector employees will enter the labour reserve, and military and police officers will receive salaries cut by 12%. The end of the 13^th and 14^th salaries for employees in the public administration and the elderly is coming and those employed in state enterprises will receive 35% lower wages. The single payment for retirement will be reduced by 40%.

These are just some of the measures that the Ministry of Finance will present to the European creditors in its attempt to convince them that Greece is ready to make efforts to remain a full member of the euro zone. At the same time, the country is on the verge of disaster. This year, the recession is expected to exceed 7% and despite the debt restructuring in early 2012, Greece is experiencing serious difficulties in fulfilling its obligations to creditors. The financial aid is insufficient, the debt is growing and the future is unclear.

GRReporter turned to Dionisis Hionis, Professor of Economics at the Democritus University of Thrace to present his views on the developments in the Greek economy.

Do you expect a second haircut of the Greek debt?

Yes, I firmly believe that there will be a reduction of the debt held by the official sector - OSI (Official Sector Involvement). I think there will be a haircut of Greek bonds held by central banks, mainly by the European Central Bank. This debt should be reduced, so that the obligations of Greece become executable. I think the face value of bonds held by the official sector could be reduced by 30% -35%. This will reduce the debt burden of Greece with another 50-70 billion euro.

The process is not difficult. Let me give you an example. The European Central Bank has bought Greek government bonds from the secondary financial market, paying 60% -65% of the nominal value of the bonds. Currently, the Bank is accounting for 100% of their value. The maturity of such a bond is in the next days. Its face value is 3.2 billion euro but the European Central Bank paid for it only 60% of its original price. Therefore, what should be done is to align the accounting value of the Greek bonds held by the official sector at their real market values.

The Greek government is planning severe austerity measures, which include cuts in the budget of almost 14 billion euro in order for the country to continue to receive aid from the European countries and the International Monetary Fund. Do you think this programme is feasible?

First, we must say that it is imperative for Greece to align its budget. The country faces serious difficulties in financing its budget deficit from international markets, so it must reduce its costs to its revenues. It would be easier to Greece if it were granted more time to implement its programme. The aggressive implementation of the specific measures in a short time results in major social and socio-political consequences.

It is very difficult to cut the public administration and drastically reduce the number of civil servants in a country where 60% of GDP is the result of the activities of the public sector. On the one hand, it is required but it is difficult to implement it on the other. The situation gets even harder because no one lends the country to enable it to compensate the gaps in the process of change.

The recovery programme, which includes fiscal consolidation and structural reforms in the country, is part of the bailout agreement. I hope that the creditors of Greece will give the country extra time to meet the fiscal targets so that the implementation of these measures will have a slight effect on the real economy and households. The effect will be on employment, social policy, quality of life, healthcare, public administration activities and other sectors.

The problem with Greece in the last two and a half years was that it often made promises in order to have more time and resources, but it did not keep them later. Do you think the government of Antonis Samaras will act differently this time?

Greece no longer can allow itself to not keep the arrangements. The signals the government has sent so far are very positive, both for the privatization and the reform and for the restructuring of the state system. The measures to improve these sectors will increase the confidence in Greece.

As you noted, the biggest problem in the last two years was the lack of confidence. The Greek government made big promises, which it failed to keep in practice. Given the situation in Europe and the world, I do not think there is a great opportunity for omissions hereafter.

What do you think will be the conclusions of the supervisory Troika in its next report, which is to be released this autumn assuming that Greece has learned its lesson?

The report the Troika is currently preparing will assess a dead period for the Greek economy - from February to July 2012. There were two parliamentary election rounds in the country during this period and the state administration was literally paralyzed. It is logical to not have achieved budget targets. The report expected in September will describe the results of this unfruitful period. This does not mean that the next report will have the same characteristics, as it will focus on the current activities of the government, which is already actively following the planned programme.