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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.

I am asking you about the September report of the creditors, because it will determine whether Greece will receive the next tranche of the aid of 31 billion euro.

From now on, the aid to Greece as well as the managing of the debt crisis both here and in Europe will be a political process rather than a decision of a technocratic basis. This means that the granting or the cancellation of the aid to Greece will be based on political decisions.

Does this mean that the German economy minister Philipp Roesler relies on populist tricks, when pushing to terminate the aid to Greece if it failed to fully meet its obligations under the Memorandum?

I do not know if it could be called populism, but this position expresses the internal political mood in Germany rather than the real situation. The issue of the Greek crisis is much more serious than many people think. It is not because it is about Greece itself, but because it relates to the way in which Europe intends to address the European debt crisis.

So far, the European Union has been looking on, watching and assessing. Until recently, there was no direct intervention with which to establish a mechanism for the management of the debt crisis. There was no protection for the Italian, Spanish and even German bonds. The longer this process is delayed, the more serious the problem in Europe.

What do you think are the measures that Brussels should take to protect the interests of Europe?

A real involvement of the European Central Bank in the secondary bond market could have solved the problem.

This happened to a certain extent in recent years, mainly with the Greek government bonds after the introduction of the Memorandum of financial aid.

The interference was negligible. Financial markets were never assured that a specialized body, whether the European Financial Stability Facility (EFSF) or the European Central Bank, would take measures to protect the Portuguese, Spanish and Italian bonds. The markets saw a pretty cool position of the European Union against the speculative attacks over the bond market.

Leaders have made the first step by proposing unification of the fiscal policy in the euro zone. They suggested that the European Central Bank should take over the supervision of the financial systems of the countries of the monetary union. How would you assess this development?

The single economic community that we want to establish in Europe implies the unification of financial policies. Therefore, unified supervision of banks should be established. As we have seen so far, giving a financial aid following a decision taken by the leaders during summits suggests the introduction of a single economic control. This process, however, will take some time to be put into practice. The system cannot change overnight. In other words, decisions of this type are important, but we cannot expect immediate results.

Let’s go back to the Greek issue. What do you think are the immediate measures to be taken in order for the country to be on the right tracks?

Greece needs a plan to establish economic growth. This is our biggest problem at present. We also need to find the right formula to attract foreign investment. The combination of these two conditions will help us to stop the recession and make things work for us.

Another big problem that needs to be addressed is the bank issue. The recession will increase if there is no cash and bank funding for the real business.

Greece's budget deficit remains very large. Before we talk about a plan to stimulate economic growth, shouldn’t we do something about reducing costs?

The deficit is directly dependent on the recession, because it reduces the effect of budget cuts and affects the GDP negatively. The recession makes it even more painful for the government to rescue the public finances.

You are talking about attracting investment and economic growth, but Greece is known for its cumbersome and inefficient tax system. What should be done to change it?

It is what we have been repeating for years. The tax system should be simplified. The same applies to the administrative procedures relating to the real business.

The increased tax burden on the private sector in Greece is a fact. The former government made a fundamental error. It dramatically increased the taxes but did not reduce proportionally the costs in the public sector. More importance should have been given to cuts in budget spending in order for the private initiative to able to function more effectively.

Do you think that the tripartite coalition with Prime Minister Antonis Samaras is ready to cut government spending adequately?

If he wants to succeed, he should do it. Otherwise, the chances of success of this government are very small.

How do you assess the sale of the Agricultural Bank (ATEbank)? This was the first major privatization of the present government.

The state had to find 4.5 billion euro for recapitalization in order for the Agricultural Bank to continue to exist. It was impossible at that time. Any measure that is associated with the healing of the local banking system, improving its functioning and with the improvement of the financial condition of the banks is a positive step.

It was the right move to sell the Agricultural Bank. As for other financial market players, we will have the opportunity to see how things will develop when it becomes clear how the Greek fund for financial support will implement the recapitalization of banks. This will be clear by the middle of September. It should be officially announced whether the recapitalization would be combined with giving preference shares with voting right or with only ordinary shares without voting right. It will be not be fatal if part of the control of banks falls into state hands for a limited period of time. It is important to rescue financial institutions.