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Tuesday, March 13, 2012

The Second Economic Adjustment Programme for Greece - Deconstructed

Andrew Tyrie, chairman of the Treasury Select Committee, has called for Greece to exit the Euro and for the resources of the International Monetary Fund (IMF) to be significantly boosted to tackle future financial crises.

He is talking sense, based on the report "The Second Economic Adjustment Programme for Greece" issued today by the European Commission, Greece doesn't have a cat's chance in hell of recovering whilst it remains a prisoner of the Eurozone.

Here are a few choice cuts from the report, together with my deconstruction of what they mean for Greece:

"Greece made mixed progress towards the ambitious objectives of the first adjustment programme. Several factors hampered implementation: political instability, social unrest and issues of administrative capacity and, more fundamentally, a recession that was much deeper than previously projected."

In other words, the figures on which rescue "plans" are based are wrong and consistently unreliable.

"..insufficient progress was made in modernising revenue administration and expenditure control, and steps taken in the fight against tax evasion and the prompt settlement of payments to suppliers have remained far too timid."

Until Greece actually develops a tax system that does what it says on the box, it will not be able to fund itself. This of course won't happen, as the political system is corrupt.

"Greece has been unable to return to the markets so far."

As a result of the debt swap Greece will never be able to return to the markets for funding, as the markets will never trust it enough to lend it money again.

"The economy continues to contract and short-term growth rates have been further revised downwards. In 2011, the economy is estimated to have contracted by 6.9 percent."
The economy is screwed!

"Greece's medium-term economic performance will crucially depend on the implementation of structural reforms. These reforms, particularly those in the labour market, the liberalisation of several sectors and a number of measures to improve the business environment should help promote competition, spur productivity and employment growth and reduce production costs."

Based on "progress" so far, these reforms simply will not happen.

"Greece has to restore competitiveness through an ambitious internal devaluation, i.e., a reduction in prices and production costs relative to its competitors, as well as a shift from a consumption-led to an export-led economy. Since a strong increase in productivity takes time, an upfront reduction in nominal wage and non-wage costs is necessary."

Things are going to become a lot worse for the ordinary working/unemployed Greek citizen.

"Current projections reveal large fiscal gaps in 2013-14. Current projections reveal a cumulated fiscal gap in 2013-14 of 5½ percent of GDP. Therefore, substantial additional expenditure cuts will have to be announced and adopted by Greece in the coming months, in particular when Greece updates its medium-term budget (medium-term fiscal strategy or MTFS) in May 2012."

As noted, things are going to become a lot worse!

"Progress in privatisation has been slower than planned."

Another pipe dream that will never materialise!

"In a moderately optimistic but realistic scenario, if Greece meets the programme targets, the debt-to-GDP ratio will decline to about 117 percent in 2020. However, it will remain high for many years and, therefore, be susceptible to adverse domestic and global developments."

In eight years, what could possibly go wrong?

"Implementation risks will remain very high. The success of the second programme depends chiefly on Greece. It crucially hinges on the full and timely implementation of fiscal consolidation and  growth-enhancing structural reforms agreed under the programme. "

Not a cat's chance in hell of succeeding!

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