Crucial economic issues postponed for the new election period

Greece is heading from one election to another, while the Greek society and the international public opinion turn their eyes to the thorny problems that are pushing for solutions.

While panic is overshadowing the real economy and the market, and the Greek society struggles or hopes for solutions to the consequences of a disorderly default, the political leadership of the country did not care to place a "safety net". In the economy field however, nothing substantial has changed in the first pre-election half, except for the unilateral preconceived austerity measures and the reduction of salaries in the private sector and the payment of the bond that expired yesterday.

The only thing that changed is the establishment of a climate of political uncertainty in the country, with plenty of election “relaxation”, disputes and conflicts, which took the spotlight away from the real situation in the economy and postponed the very harsh austerity measures for an uncertain tomorrow.

Obviously any discussion of austerity measures of the memorandum has no real basis now, since even the Troika noted that almost nothing applies while lack of governance looms overhead.

The negotiation for most of the regulations and commitments that were pending before May 6 is essentially postponed until after the new elections.

Any government that might emerge in June should immediately resolve the issue of the non-acceptance of the PSI from some investors who were not included in the haircut. The amount of these bonds plus the SOE loans that were left out of the PSI reach 6.4 billion euros, but the payment of the bond of 435 million might whet the appetite of more holders to challenge the PSI.
 

The recapitalization terms for banks are the second major outstanding issue. Although the EFSF supported the banking system by adopting the transitional scheme for the funding of banks through the transfer of 18 billion of EFSF bonds, the direct payments and balances of 25 billion euros to credit institutions remains to be resolved by the new government in consultation with the EU. While this issue remains unresolved, the banking system will not be able to restore its function and provide liquidity to the economy.
 
The call of the President of the Republic Karolos Papoulias to political leaders, warning them that the banking sector is shocked by the outflow of funds by the quite insecure and anxious depositors, is indicative of the problem for banks during the prolonged political dead-end.
 
Furthermore, the Troika requirement for measures of 11.6 billion euros or 5.5% of the GDP for the period of 2013-2014 is put on a new basis, since the delay in achieving the objectives of the memorandum in the first half of 2012 creates a new black hole that seems impossible to cover during a particularly intensive 2nd semester.

This means that a new government will be forced to deal with the pressure early on, not only of the memorandum but also of the stability of the Greek Economy. The pre-election promises to compensate loss of income etc from the staffs of almost all parties are likely to be canceled. Instead, the new government may be able to redefine its policy in relation to the commitments of the memorandum.

It is still unclear what will happen to taxation, tax collection and the new objective values. Changes in prices for property tax should be implemented in June, but there has been no preparation, the latest BoG figures show a new price drop by 9.3% in the real estate market, and nothing seems sufficient to compensate for the revenue losses that were provided for in the Memorandum.

The June discussion agenda with the Troika will include:

-          drafting of a new mid-term program for 2012 – 2016

-          closures of state agencies and lay-offs

-          decreases in special state payrolls

-          further decrease in state expenses

-          new taxation legislation

-          elimination of tax exemptions and special tax regimes for income and VAT tax

-          integration of taxes into real estate

-          new income tax bracket with 5 levels instead of the current 8 and maximum tax rate of 40% rather than today’s 45%

-          deregulation measures for the market of products and medicines

-          deregulation of 30 professions by September

-          measures for decreasing bureaucracy.