Greece is experiencing a wave of protests. People are afraid of limited privileges and increased taxes. The country is in a difficult economic situation and the expected conflict with creditors is not helping. Does this mean that the risk of Grexit is coming back? Marcin Lipka, Cinkciarz.pl analyst answers this question.
The aid package established for Greece in summer 2015, was related to a wide plan of reform. In exchange for 86 billion euro, the Greek government obliged to fix the tax system, solve the problems of central administration, and to also conduct wide programs of privatization and liberalization of the market. An important point of these resolutions was also a necessary limit in pension expenses.
Greece immediately received 13 billion euro out of the whole amount. The majority of this money has been spent on paying the debts. By the end of 2015, almost 11 billion euro of overdue and current payments for the ECB and the IMF had been executed.
How are Greeks handling the introduction of changes?
Up until now, the reform included an increase in the VAT for the islands and a reduction of tax exemption for the farmers. The program of privatization was also executed, however it is going relatively slowly. It is difficult to imagine, however, that the plan of gathering 50 billion euro out of privatization would ever be fulfilled. Half of this money was supposed to be given back to the debtors who capitalized the banks. A further 25% is to go to pay the debts, and the rest of the money will be contributed towards a special fund, which finances the public investments.
According to information from HRADF, a fund which sells the national assets, the Greeks established a contract for the licensing of 14 regional airports. It is supposed to bring an immediate income of 1.23 billion euro, and also 22.9 million euro per year for the forthcoming 40 years. Additionally, a contract for selling 67% of shares in the port of Piraeus was signed on January 20th 2016. This transaction is valued at 368 million euro. However, it is worth noting that the above transactions were already planned before the last year's agreement between Greece and its creditors.The first aid program from 2010 also assumed that Greece would privatize its assets, worth 50 billion euro, in 10 years. In May 2014, the Reuters agency wrote that the privatization plan for the years 2010-2020 had been revised to 22.4 billion euro. For the first 4 years the sale on the level of 4.9 billion euros had been executed, despite the fact that the initial plan was to make 22 billion euro worth of income from privatization between 2010 and 2013.
Pensions are the point of contention
One of the basic conditions of giving Greece the aid, was a promise of reforming the pension system. This obligation is the most controversial. However, no reform of pension has been conducted yet. The British CPS think tank wrote that basing the ELSTAT (the Greek statistical office) data from July 2015, that less than 2 billion euro per month would bespent for pensions for 2 million citizens. A simple calculation gives a result of approximately 1000 euro for the average pension.
According to the latest Eurostat data (from 2012), Greece spends more than 14% of the GDP on pension benefits. This is the most in the European Union. In Poland for example, it is approximately 8% of the GDP. Additionally, according to the Eurostat data from 2014, only 34% of Greeks in age between 55 and 64 years still work. This fact is partly due to a high unemployment rate. For comparison, Spain experienced a similar problem with unemployment as did the Greeks, but the above given relation was 44.3%.
The Prime Minister Tsipras also sees the necessity of conducting changes in the pension system. During the meeting of the parliament on January 26th 2016, he warned that without reform, the Greek system will collapse. However, his government assumes that it will be based mostly on an increase in contribution paid by employers and employees. The creditors on the other hand (especially the IMF, which is supposed to be included in paying the future aid installments), also want a reduction of expenses, which would mean a decrease in benefits for the current and future pensioners.
This matter is also complicated by an uncertain political situation in Greece. Since the elections in September, the majority of the parliament of Syriza and euro-skeptical party ANEL, decreased to only three votes. Additionally, according to the surveys from January cited by the Bloomberg agency, the opposition party New Democracy now has 3-4% of advantage over Syriza. This is a significant change. September elections saw that Tsipras' party was supported by 7% more electors than the New Democracy.
Since the beginning of January, the country has been experiencing the protests of many social groups. The Greeks are afraid of the reduction of benefits and higher taxes. Considering the fact that the country is still in a difficult economic situation, and a conflict with the creditors is expected, one can assume that the risk of Grexit will once again be a subject of discussion on the financial market. The situation in Athens should return to the headlines of the global press during few following weeks.