The country is faced with a dramatic deadened as the unprecedented recession, rampant unemployment, non-existent cash flow and insecurity amongst employees and businesses have crippled the economy. The government presented the harsh reality evident by the drop of tax revenue and the decline of insurance fund contributions, while the troika representatives insist on implementing everything agreed in the memorandum, especially reducing the number of civil servants by 25,000 by the end of the year.

The troika head Matthias Mors was shaken for the first time, during the relentless conversations with the Minister of Finances Giannis Stournaras and staff of the General Accounting Office, when it became apparent that if the recession continues and unemployment rates reach 30%, then it will not just be the memorandum at risk, but the country’s political stability. This might be more of a concern following the political situation in Italy and Europe-wide reactions to austerity.

Deep breaths

Leading economists point out that the 53-billion-euro loan issued to Greece in December, which was a decision to keep Greece in the Eurozone, dispelled doubts regarding the currency’s future. The explosion of unemployment though, reaching 27% by the end of 2012, the increase of taxation and cuts in wages and pensions in January, have resulted in a dramatic drop in consumption as income worries grow stronger.

Households were forced to reduce their super-market purchases further more (12% reduction in January), while 500,000 are requesting a settlement with DEI, unable to pay their bills. They note that “this is how we entered the vicious cycle of the economic dip, threatening everything around us, stores, businesses, property…”

Based on the fact that three quarters of the GDP is based on consumption, the recession becomes much more intense, to point that IMF’s Bob Traa recognizes the problem and worries about the financial and political repercussions of this development.

During the regular troika inspection of the Ministry of Finances and KEPE president Panagiotis Korliras (and following the publication of employment div of 30.1%), Mr. Traa confessed that he has “never seen a five-year recession”. Mr. Traa also requested a detailed briefing on official predictions that overturn the previous memorandum’s “predictions”.

By looking back at relevant bibliographies, the collapse of the Greek economy can only be compared to periods of war or the Great Depression of 1929. The troika was unable to predict that too…

Lack of funds

The situation is exacerbated by the lack of cash flow in the market and economy. The Ministry of Finances has only paid one quarter of its debts to individuals (2 out of 8 billion euros owed), the banks are tied up by the commissioners and the problems in recapitalization have “blocked up” the country.

VAT revenue was reduced by about 17% in January and February, with a total drop of 600 million euros for the first two months in 2013. The situation was slightly improved by the prepayment of dividends by the Bank of Greece and the increased tax on income.

What is more worrying though is the drop of revenue at insurance funds, estimated at 20% and about 490 million euros in January and over 400 million euros in February. All this means that the troika representatives might well ask for further cuts in the next trimester, even if everyone realizes that the government is not able or willing to take further measures.

New 4.5-billion-euro deficit

According to projections by troika specialists “should the recession and unemployment not stop, then the general governments revenue from taxes and contributions will be 4.5 billion euros short of memorandum predictions”.

The Minister of Finances Giannis Stournaras noted that we are the recession “low point”, employment was increased in February and everyone awaits the regulation in order to settle their debts at tax offices and funds. The ministry expects that settling debts will generate about 3 billion euros by the end of the year.

The adjustment of taxes and contributions was handled by the new IMF representatives in Greece Mr. Mark Flanagan, who suggested “a common settlement for all debts, taxes and contributions in 36 installments for everyone”. The question that remains is what will be done to cover the further 1.5 billion missing from the troika predictions.

This is where the troika’s insistence comes into play, especially Poul Tomsen, demanding that the Minister of Administrative Reform Antonis Manitakis “finish with the ministerial organization charts and reduce the number of civil servants, as agreed in December”. The target of 25,000 civil servants suspended this year, with 25% dismissed when the suspension period ends, still remains.

Officials who participated in these discussions commented that the Minister “went through a Holy Inquisition regarding changes to the public administration” and was accused of being unable to dismiss some 870 civil servants convicted by courts of law.

“Good” troika / “bad” troika

Poul Tomsen, who is rumoured to depart Greece soon, will participate in the troika’s final discussions with the PM. It was Mr. Tomsen who insisted on layoffs for the public sector and preserving the property tax collected via DEI.

Matthias Mors appeared to be calmer and conciliatory, making every effort so that the final report suggests that “the program is on target and Greece is fulfilling its obligations”. Mr. Mors explained that the minimum wage was not at risk but solutions for unemployment must be found. Mr. Mors requested that the government come up with some proposals for the issue, which threatens the Greek rescue.

Zois Tsolis