Six months of procrastination, random statements and ranting by the Greek government, culminating with the surprise announcement of the referendum on the 5th of July, have had the effect of nullifying the trust of European partners. Consequently, they have demanded very firm and specific commitments in exchange for a new aid plan. If the scenario of a Grexit was discussed during the weekend, it was excluded from the final statement, at the price of heavy counterparties for Alexis Tsipras.
By 15th of July, the Greek authorities must adopt laws in order to:
- streamline the VAT system and broaden the tax base;
- take measures that will ensure the long term sustainability of the pension system;
- preserve the independence of the Greek statistical agency;
- implement the provisions of the “Treaty on stability, coordination and governance” by introducing automatic spending cuts in case of deviations from the primary surplus targets.
By the 22nd of July, the reform of the civil procedure must be voted as well as the transposition of the directive on the recovery and resolution of banking crises. The vote on Friday night, during which the opposition parties showed support towards Alexis Tsipras’s mandate allows us to be confident, but the country will not make the economy of a restructuring of government, the leftmost like fringe of Syriza seceding. Early elections in the fall have also been mentioned. It is likely that the u-turn from Alexis Tsipras after the referendum will cost him in terms of popularity. The left fringe of Syriza could then campaign on a possible exit from the Eurozone.
Once these laws adopted, the negotiation procedure of a memorandum of understanding can begin. It will require a vote authorising the opening of negotiations in several national parliaments (presumably Germany, France, the Netherlands, Austria, Slovakia and Estonia, but other countries may choose to vote). Thereafter, the Eurogroup may formally launch negotiations for a third aid package.
As part of these negotiations, the Greek government must propose a precise roadmap of changes to implement, and a timetable for these.
Among the topics to be given priority are reforms to
- the pension system,
- the regulation of product and service markets,
- the labour market,
- the financial sector.
The Greek government must then submit to the institutions any proposed legislation before it is debated in parliament. It must also reconsider the majority of laws adopted since January and reassess commitments towards previous programs. Finally, in contradiction to the Greek demands, the IMF remains a stakeholder.
A privatisation program would see € 50 billion of assets transferred to an independent body in charge of selling the assets. € 25 billion would be allocated to repay bank recapitalisation, € 12,5 billion to the reduction of the debt ratio, the rest to be used for various investments.
The new aid package would cover an amount of approximately € 82-86 billion. € 7 billion are needed by the 20th of July and € 5 billion by mid-August to face the next upcoming deadlines.
The Eurogroup gathers today in order to find an agreement on a temporary funding without awaiting the outcome of the negotiations.
The agreement emphasises on the responsibility of the Greeks in the degradation of the economic environment and therefore the sustainability of the debt. A reduction of the nominal debt is excluded but new measures on the maturity and the loan rate may be taken on provided that the government implements the reforms. The statement did not mention any numerical targets concerning the budget balances. These will probably be discussed in the upcoming weeks.
To sum up, this agreement is much tougher than what the Greek government could have negotiated if there had been a more constructive approach since the beginning of the year. The loss of confidence and the deterioration of the Greek situation have led to an increase in demands. Many steps must still to be taken and many votes must still be won before the country is launched on a new aid plan. As many occasions could derail the process and push back the country towards a Grexit.
This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.
