Reports by local and international media (Ekathimerini, FT, Bloomberg) indicate that the Greek government has agreed on fiscal measures, including the 2012 budget, which will be submitted to a parliamentary budget committee today. While the government plans have not yet been made public, according to the press the plans include details on revised deficit targets, new growth projections, and cuts to the public sector wage bill. The latter is of critical importance: since the beginning of the programme there have been no significant cuts in public sector employment. The press also reports that the Troika will continue monitoring some key programme implementation aspects in the coming days. Of particular relevance is the implementation of a unified payment system for civil servants planned to be deployed on 1 November, which proposes wage cuts of up to 20% for higher-paid public sector employees.
Will EU-IMF complete the review and release the next tranche?
Probably yes. The technical teams currently in Athens (and continuing with the review this week) will focus on monitoring programme implementation. Implementation had fallen behind schedule, especially after the approval of the MTFS about three months ago. Of critical importance for the completion of this review are the implementation of the measures to cut the public sector employment and wages, as well as approval of the 2012 budget. Failure to implement corrective measures and especially the cuts to the public sector wage bill would likely result in the technical teams issuing a negative report recommending against the completion of programme review.
However, it is important to highlight that the completion of the review and the release of the next tranche will be a decision made not by the technical teams but by the Eurogroup and the IMF Board. Regarding the timing of the approval by the Eurogroup and IMF Board, the international press mentions that the Eurogroup meeting in mid-October (17-18 October) will decide on the approval of the fifth. The IMF Board decision will likely be made a couple of weeks after the IMF technical team submits its review. There is no specific date for that, but the technical team should finish the review some time next week.
The delays in the completion of this review and the delay in the disbursement of the sixth tranche (EUR8bn) leaves the cash position of the Greek treasury under severe strain. It is likely that the Treasury will have to issue some Tbills and prioritize government expenditure until they receive the sixth disbursement from the EU and IMF, possibly not until late October or early November.
The EU and IMF will also need to discuss and agree on funding plans going forward. The worse-than-expected fiscal and growth performance, below programme targets, has led to additional funding needs for the programme. The EU and IMF will need to agree on who will be providing the additional funds before the completion of this review. As part of the solution there could be amendments to the PSI exercise, such as, for example, a larger buyback programme than originally planned, and extending the PSI to bond maturing beyond 2020.
Details of the fiscal measures
The draft 2012 budget will be submitted to the parliamentary finance committee today. According to the press reports, the budget revises the 2011-12 deficit targets up: from 7.6% to 8.5% of GDP for 2011, and from 6.5% to 6.8% of GDP, for 2012. The plans assume the government will reach a primary surplus of 1.5% of GDP. The government has also revised down the growth projection for 2012 to -2% (BarCap -2.5%).
According to Ekathimerini, the total additional fiscal measures for the remaining of 2011 and for 2012 amount to EUR6.6bn. Among the key fiscal measures, 30K public sector employees will be put in an employment reserve fund by end-2011, with a 40% salary cut, and would be laid off after a year if they cannot be reallocated. Of those in the reserve fund, 20K are 60yr or older and the rest are in public entities that are to be restructured or closed.
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