Centeno to 'N': 'Enhanced surveillance' of Greek finances, economy ensures credibility with EZ partners, markets

Wednesday, 04 July 2018 07:36

"There is a commitment of the Europeans to consider more debt relief, if needed. We have shown that this is a credible promise"

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By Vassilis Kostoulas

Eurogroup President Mario Centeno more-or-less dampened expectations over any "discounts" in agreed-to reforms and austerity measures to be imposed in Greece next year, commenting more than a week after Eurozone creditors extended medium-term debt relief and finalized an "enhanced surveillance" framework for the country in the post-memorandum era.

In an exclusive interview with "N", the Portuguese economist and politician emphasized that he expects that Greece will not "deviate" from its commitments to institutional creditors, when asked about repeated statements, over the recent period, by top Greek ministers and cadres hinting at watered down pension cuts - milder than what the Tsipras coalition government has agreed to impose as of Jan. 1, 2019 - as well as promises to restore more favorable sector-wide collective bargaining agreements and even raise minimum monthly wage scales.

On a brighter note, he said he sees more room to maneuver for the Greek government after August 2018 to chart its own policies.

At the same time, the Eurogroup president and Portuguese finance minister rejects the argument that "super surpluses" impede economic growth, while also shying away from comparisons of Greece's higher yield on 10-year bonds than other Eurozone members, i.e. compared to Portugal's.

"Greece is six weeks away from the end of its program. Portugal has left its program four years ago. Market access is not an automatic blessing at the end of a program. You earn investors’ trust after several (bond) issuances before the end of the program and then you build it up with credible policies after the program. Greece is totally on the right track," he emphasized.

Also, despite the fact that "enhanced surveillance" is being applied on a Eurozone member for the first time - replete with quarterly reviews by all institutional creditors - Centeno insisted that Greece's exit from the bailout era is similar to those of other EZ members.

Finally, he called the IMF's decision not to activate its funding program for Greece a "non issue", while expressing a hope that "Greece will reduce its tax burden inherited from the peak of the crisis. "

Practically, how independent will the economic policy be in Greece? Would you like to describe how the status of enhanced surveillance will work from August onwards?

"Going back is not really an option"

For every European country, particularly those in a monetary union, there are always some strings attached. Greece is no different. The end of the programme will bring about more room to manoeuvre and calibrate its policies. Greece will be asked to stay the course, but it will have more flexibility to define the path towards the big goal - that is to raise potential growth. Enhanced surveillance in the post programme phase will help Greece to chart its economic path in a credible way. Credible for the European creditors, which have a large stake in Greece; credible for the markets, whose confidence is critical. Surveillance will start at the end of the programme and involve all institutions. It will entail quarterly reports and additional information gathering. It has nothing to do with a programme - that will end in August 20th.

On which reforms would you say that Greece should focus its attention from now on? What will be the factor that will define the success of the post-programme period?

The Greek government knows what to do. The June 2018 EG statement sets out six areas of reform Greece needs to pay attention to: fiscal policy, social welfare, financial stability, labour and product markets, privatisation and public administration. In all these, Greece is a world apart from where it was 8 years ago. What it needs to do is stay the course and ensure reforms that have been implemented continue to deliver good results. If Greece continues to own these policies beyond the programme period, it will surely find an authoritative way to reflect its new policy preferences without jeopardising the progress made so far. That will be the measure of success in the post program period.

The main goal of the adjustment programmes in Greece was the country's sustainable return to the markets. Today, the yield of the Greek 10-year bond is moving around 4%, when the yield of the Portuguese 10-year bond is moving around 1.5%. What does this indicate about Greece's performance and, above all, its outlook in the medium term?

The comparison you are making is not particularly informative. Greece is 6 weeks away from the end of its program. Portugal has left its program 4 years ago. Market access is not an automatic blessing at the end of a programme. You earn investors’ trust after several issuances before the end of the program and then you build it up with credible policies after the programme. Greece is totally on the right track. Portugal can indeed provide a good example for Greece in many ways. Despite its limited budget leeway, Portugal complied with fiscal rules as it supported growth with a healthy mix of demand and supply growth-enhancing policies.

Maybe you have heard about the criticism that the programmes in Greece mainly focused on the fiscal part of the adjustment, without delivering tangible results in areas that are crucial to investment and growth, such as public administration and justice, a fact which is reflected both in the low ranking in competitiveness indicators and in the high borrowing costs in the markets. Should some actions had been different, in your opinion?

It is easy to look back in anger. No one can be happy about the hardship the people have gone through during the adjustment programme. In all fairness, the adjustment programmes have evolved a lot. Europeans had no experience in managing an adjustment programme. If you compare the policy conditions of the first programme and the ESM programme you will see important differences in focus and sequencing.

In any case, one thing is clear: upfront adjustment in Greece was needed and a deficit above 15% of GDP required immediate fiscal measures. Budget cuts work fast and reforms take time to produce results. This is why I like to talk about patience in economics. And the institutions, including the European ones, should be ready to supply it. I’m happy that minister Tsakalotos was able to deliver a soft landing. I prefer to look at the future with a positive tone.

The IMF estimates that the Greek debt is sustainable in the medium term, but not in the long run. Do you think that this statement is sufficient, for the time being, regarding Greece's profile towards the markets?

The uncertainty about projections that stretch as far as to 2060 is very significant. What is critical for investors is whether Greece has the ability to serve its debt in the foreseeable future and to grow out of these crisis years. The former was guaranteed by our June agreement; the latter is clearly underway. The rest are formalistic arguments that are less important for investors. The debt sustainability analysis done by the European institutions is clear about the sustainability of Greek debt. The IMF MD Christine Lagarde has concurred with the analysis of the Europeans up to the medium term. For the long term, there is a commitment of the Europeans to consider more debt relief, if needed. We have shown that this is a credible promise.

In any case, the IMF did not activate its funding programme in Greece. Would you say this was the “black spot” of the deal?

This is a complete non-issue. The Europeans provided Greece an envelope of up to €86billion which was enough to cover the programme needs. The IMF was always involved in Greece’s adjustment. It provided funds and participated actively in the programme monitoring. It will continue to participate in the future in the context of the post programme. The IMF is engaged, that is the most important.

The Greek government, relying on the fiscal space through the super-surpluses and the fact that the IMF now has mainly a consultative role in Greece, states its intention to reduce the amount of cuts agreed in pensions. Is it something that could "work", in your opinion?

I will not judge policy intentions here. As I said before, I expect Greece not to deviate from previous commitments and, at the same time, to use the scope of policy options that arise from the program exit in a smart and responsible way. Going back is not really an option.

Would it be appropriate for the best results of the Greek economy to restore more favorable terms to collective agreements and raise the minimum wage?

This is a judgment call for the Greek government, social partners and political actors. From the side of the European partners and institutions, in the context of the post programme, policy actions that will touch upon commitments made under the programme will be looked at and assessed. Derailing the stability and growth path is not what we have in mind as a way forward for Greece.

High taxes combined with high insurance contributions, according to OECD figures, make Greece "champion" in this area. This removes incentives for production and labor. On the contrary, it strengthens "black" economy. Do we shoot ourselves in the feet with this fiscal policy? Do we bring the opposite of the expected results?

According to the OECD, Greece is a reform champion. That is the reflex of a tremendous effort to modernise the economy in the last years. Many of these reforms take time to deliver results, but we know this is the way to increase potential growth. At the same time, in the early days of the crisis, raising taxes and cutting expenses were the most immediate tools to address fiscal imbalances. With time, as reforms started delivering higher growth rates, I hope Greece will reduce its tax burden inherited from the peak of the crisis. Portugal is an example of how to gradually lift surcharges on income without damaging competitiveness nor fiscal consolidation.

Under what circumstances could the Eurogroup reconsider the targets for primary surpluses, which are high even in the period after 2022, putting strong pressure on the growth prospects of the Greek economy?

We have just agreed with Greece on a credible fiscal path. Recent couple of years show how growth can pick up with a significant primary surplus.

Is Eurogroup satisfied with the rate of consolidation of non-performing loans in Greece? When should we expect the lifting of the capital controls, which were imposed by the Greek government on the Greek banks 3 years ago?

Greek banks have been meeting targets to reduce the NPL stock and this needs to continue. No efforts should be spared and more and more ambitious targets should be attained. Deleveraging is key to release firepower to support the economy. The measures included in the programme to assist banks in reducing NPLs, such as out-of-court workout law and the electronic auctions platform for the sale of assets, will help reduce this burden in banks.

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