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New bailout program for Greece?

Details of Greece's bailout program update, as agreed between the Tsipras government and the creditors, include 82 prior actions

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A woman uses her fan to cool down outside the Bank of Greece headquarters in Athens. Photo: AP /Thanassis Stavrakis

15 December 2017

he Greek government has at least four difficult months ahead of it to set in motion the 82 prior actions included in the third review of the European Stability Mechanism (ESM). These actions are outlined in a supplemental Memorandum of Understanding: Greece (SMoU) approved by the ESM Board of Governors and signed by Greece and the European Commission, acting on behalf of the ESM, on 5 July. The Third Review of the ESM was leaked last weekend and printed in the Sunday edition of acclaimed broadsheet newspaper Kathimerini. The SMoU review draft, dated 3 December, reads as a summary of Greece's story so far, beginning with the signature of the third memorandum: "In July 2015, Greece requested support from its European partners to restore sustainable growth, create jobs, reduce inequalities, and address the risks to its own financial stability and to that of the euro area".

It goes on to say "In August 2015, the Hellenic Republic concluded an agreement for stability support in the form of a loan from the European Stability Mechanism for an availability period of three years". This update on the bailout program sets out the country's main goal, which is for it to be over by August 2018.

In order for Greece to achieve it, a detailed action plan is set out for the Greek government before the program's fourth and final review.
What is clearly laid out throughout the leaked document, is that Athens will not do anything without permission from the 'institutions' i.e. the lenders' representatives. This is expressed with a statement at the start of the agreement: 'Success requires ownership of the reform agenda by the Greek authorities. The government therefore stands ready to take any measures that may become appropriate for this purpose as circumstances change.'

These measures include regulation of industrial relationships, protection of the banking system, provision for the Non-Performing Loans (NPLs), privatisation of public assets, mobility of the public sector, actions to fight tax evasion and corruption and a national policy to increase growth and encourage investment. Again, the document sets out the goals in eloquent language: "The recovery strategy takes into account the need for social justice and fairness, both across and within generations. Fiscal constraints have imposed hard choices, and it is therefore important that the burden of adjustment is borne by all parts of society and taking into account the ability to pay.

Priority has been placed on actions to tackle tax evasion, fraud and strategic defaults, as these impose a burden on the honest citizens and companies who pay their taxes and loans on time. Product market reforms seek to eliminate the rents accruing to vested interest groups as the associated higher prices undermine the disposable income of consumers and the competitiveness of companies.

The pension reform takes into account that existing pensioners find it more difficult to compensate for income losses and it has applied cuts progressively, based on the level of pensions. To get people back to work and prevent the entrenching of long-term unemployment, the authorities have accelerated the absorption of ESIF funds and are working to ensure an effective impact on the economy, both in the short and the long run.

A fairer society requires that Greece continues to improve the design of its welfare system, so that there is a genuine social safety net which targets scarce resources at those who need them most. In this context, the authorities have taken measures to provide access to health care for all (including the uninsured) and rolled out nationally a basic social safety net in the form of a Social Solidarity Income (SSI) in early 2017."

MEDIUM-TERM TARGETS
The 'updated memorandum' confirms Greece's commitment to target a medium-term primary surplus of 3.5 per cent of GDP, which will be maintained over the medium term until 2022. It acknowledges the country's performance so far, stating that it has not only met, but exceeded, this target and confirms that the government's decision to allocate the exceeding funds towards the most vulnerable was made in accordance with the lenders. Other basic goals include the continuation of the "ambitious privatisation program" already set in motion, as well as "the implementation of reforms to increase the quality and efficiency of the public sector in the delivery of essential public goods and services."

One issue of particular concern, regarding financial stability in Greece, is that of tackling the large stock of NPLs. "This requires in particular the effective implementation of the strengthened framework to support NPL resolution (market for NPLs, out-of-court workout (OCW), e-auctions, insolvency framework)", states the memorandum, outlining how "banks and the public sector need to speed up the restructuring of debts and the liquidation of non-viable businesses to support the recovery of the economy along with the gradual phasing out of capital controls."
The document also touches on the country's growth strategy, stating that "for the 2014-2020 period, more than €35 billion is available to Greece through EU funds and Greece should continue in its effort to maximise and speed up absorption of this envelope".

The Tsipras Government has agreed to present a growth strategy by December 2017, "which inter alia should aim at creating over the next three to five years a more attractive business environment, enhancing growth opportunities from infrastructure, improving the education system as well as human capital formation through vocational education and training (...), strengthening the financing of business, and developing R&D and innovation. It should also help design sectorial priorities in areas such as ICT, tourism, transport, pharmaceuticals, and logistics, and agriculture and agri-food. The authorities will implement the strategy with the assistance of a Scientific Development Council including social partners and sectoral business organisations as well as an advisory panel of foreign investors."

All these activities will be coordinated by the National Development Bank, which the Greek government has agreed to establish. "The new entity will not accept deposits from the public nor engage in direct lending. The new entity's functions, final structure, and by-laws will reflect in-depth consultation and agreement with the institutions and will be designed to ensure no risks to public finances and financial stability; its objectives, instruments and governance will be established in line with international best practice and with the technical support."

TAX REFORMS
The Greek government is presented with an array of deadlines, concerning all aspects of governance. In what concerns the much-debated tax reforms, authorities have agreed to undertake a series of actions by March 2018, not least among them to "review preferential tax treatments for the shipping industry in the light of the indications of the European Commission", but also to "codify and simplify the VAT legislation" and "if not already completed, the authorities will amend the Code of Public Revenue Collection to provide for the extension of the e-auctions mechanism to auctions conducted by the revenue authorities under the Code of Public Revenue Collection under its provisions."

By May 2018, the authorities will "review the stamp duty code with the aim of modernising and simplifying the stamp duty regime by taking into account the modern business environment".

As for property tax, Greece has agreed to another series of deadlines: by March 2018, "the authorities with the aid of technical support will legislate to align property tax assessment zonal values with market prices and will develop a dedicated team and a permanent IT system for property revaluation.
By May 2018 (...), the authorities will legislate to adjust tax rates and broaden the property tax base if necessary in a revenue neutral way in order to issue ENFIA bills by August 2018. The authorities will review the implementation of the capital gains tax on real estate by April 2018 and adopt legislation if needed by May 2018."

SOCIAL WELFARE
The review document goes to great lengths to make a case for what is outlined as "sustainable social welfare", an issue dominated by the overhaul of the pension system in Greece.

In terms of that, it demands, as prior action, that "at least 30 per cent of all main pension applications submitted between 13 May 2016 and December 2016 have to be recalculated and processed, without any disruption to finalising the calculation of final pensions to previous applicants; at least 3,500 supplementary pension applications submitted from 1 January 2015 will be recalculated and processed, without any disruption to finalising the calculation of final pensions to previous applicants.

"As a key deliverable, by April 2018, the authorities will calculate and process all main pension applications of 2016 and 30 per cent of main pensions applications submitted in 2017 and at least 13,800 of supplementary pension applications submitted from 1 January 2015 and 31 December 2016".

Furthermore, the Greek government is required to "phase out the solidarity grant (EKAS) for all pensioners by end of December 2019, reducing it by €570 million by 2017; €808 million by 2018; and €853 million by 2019. The authorities will adopt as a prior action the Ministerial Decision setting all the details for the awarding of EKAS in 2018. The Ministerial Decision setting all the details for the awarding of EKAS in 2019 will be issued by June 2018".

As for the health sector reforms, they include "compulsory patient registration" to be "finalised and become fully operational by March 2018".

The overhaul includes a reform of the disability benefits policy, with the aim of moving "from the current impairment assessment to an assessment including functioning conditions to determine eligibility i.e. the ability of the person to perform activities of daily living". The pilot program of the functional disability assessment system will be rolled out by February 2018, while the legislation for the national rollout of the new scheme will be adopted in May 2018, applying the new disability assessment to all contributory disability and welfare benefits, with a view to commence national implementation by June 2018.

Furthermore, the document sets a deadline for March 2018 for a new legislation regarding a "means-tested housing benefit, developed with advice from the World Bank, to be rolled out as part of the growth-enhancing measures".

PRIVATE AND PUBLIC BUSINESS
Among the reforms outlined as prior actions for the bailout program, the most significant have to do with industrial relations. This is clearly outlined in the document, which states that the Greek government, "in consultation with the social partners and in agreement with the institutions, are developing a reliable administrative system to assess representativeness, to be made operational by March 2018", with a view "to promote and monitor the representativeness of sectoral collective agreements".

The most important part of this system involves an obligation by the authorities, as a prior action, to "analyse and adopt legislation to increase the quorum for first-degree unions to vote on a strike to 50 per cent."

This will have a decisive effect on labour unions and workforce organisation in the future. Equally significant, if more, is the obligation of Greece to proceed with the long-stalled "evaluation" of its public sector workforce, something that will be done electronically. Furthermore, according to the document, the Greek authorities are already implementing the new mobility scheme for public sector employees.
"The appointing authorities of the receiving services will issue the decisions regarding the first cycle by February 2018 and changes of position by employees will take place by March 2018 (key deliverable).

Final decision on employee mobility will be taken by the receiving service with a vacant position, without involvement of the political level, and according to pre-defined rules to limit disruption in the departing service. This will rationalise the allocation of resources as well as the staffing across the General Government", reads the memorandum.

The bailout reform update touches on other sectors of business, such as agriculture, calling for the authorities to meet a deadline of April 2018, for the introduction of "incentives to boost the organisation of farmers into producer groups" and make proposals "in support of young farmers, aged up to 40 years of age".

Other provisions include the national cadastre and the long-stalled forest maps. The memorandum acknowledges that "forest maps already completed by the cadastral agency EKXA and endorsed by the forestry services covering 40 per cent of the country have already been uploaded.

By February 2018, forest maps covering an additional 15 per cent of the country's surface completed by EKXA, endorsed by the forestry services will be uploaded for public consultation. By the same date, 25 per cent of the country's surface will have ratified and definitive maps".

Another significant sector undergoing reforms is the energy sector. The document states that by March 2018, Greece "will implement the full new framework for the support of renewable energies, including the issuing of the two necessary Ministerial Decisions. The first auctions will take place in April 2018."

Last but not least, given that it has to do with what is the country's most vital source of income, the issue of privatisations is outlined in detail.
It involves "launching of the tender for the sale of 30 per cent of AIA, 65 per cent of DEPA and five per cent of OTE, on the basis of the recommendations of the hired by TAIPED advisors", by March 2018. The same deadline is to be met, regarding "the tender for the sale of 35.5 per cent of HELPE; the percentage of shares to be sold could be lower, if by that date, agreement has been reached with the institutions on an alternative form of monetisation with at least equivalent financial benefits for the Hellenic Republic. By June 2018, launch the tender for the sale or other form of monetisation of 17 per cent of PPC provided it generates at least equivalent financial benefits to the Hellenic Republic compared to the sale."

By all accounts, the third review will be officially concluded in the first part of January or even early February 2018.

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