Telephone conversation between Gikas Hardouvelis and David Marsh 16 July Explanatory note

Transcription

1 Telephone conversation between Gikas Hardouvelis and David Marsh 16 July 2015 Explanatory note OMFIF is publishing the transcript of the telephone conference with Gikas Hardouvelis, former finance minister, during the OMFIF Greek day on 16 July. OMFIF has held 30 telephone conferences on international financial and economic issues during the past two years. The conversations are always recorded, with the knowledge of the participants, and the recordings are sent to those who are on the call. The telephone conferences are normally held under the Chatham House rule, under which the source of information shared is not reported. With the consent of the participants, as in this case, the recordings and transcripts can be made available. DM: Hello, welcome to you, Prof. Gikas Hardouvelis. You are a man of some experience, because you are now professor of finance and economics at the University of Piraeus, you were the finance minister between June 2014 and January 2015 and you know a lot about what has been going on in Greece in previous years, because you were the director of the economic office of Lucas Papademos when he was the prime minister in 2011 to And of course you also have the experience of having been research adviser and economist at the Federal Reserve Bank in New York, and the chief economist of the National Bank of Greece. Welcome Gikas, thank you very much for taking the time. First of all, I can t imagine that you were very hopeful when the No vote was announced after the referendum 10 days ago. Are you a little bit more hopeful now? How would you describe the political and economic situation in Greece following this vote in the parliament in the early hours of this morning, which was quite comprehensively in favour of the reforms, even though a weaker version of the reforms had been turned down by the electorate in the referendum only 10 days previously? GH: I understand the disappointment of many people. How come you have a referendum, people say No, and then only a week later the prime minister goes the other way? To tell you the truth I was not so much surprised. I know most analysts would have given a probability of up to 90% for Grexit. I would say, I was still hopeful that the prime minister would see the light, which he did eventually. I had it as 50/50, when everybody was saying 90%. In any case, the referendum was a fake referendum. It was unconstitutional from a Greek perspective, because when you ask people Do you want to pay more taxes? of course they are going to say No. So most people said No and it was translated as a vote of confidence for the prime minister himself, not so much a No to Europe. It was essentially a No to old politicians and Yes to the young and upcoming prime minister. That s how it was interpreted. DM: Surely he has suffered a huge setback now? He seems to be wanting to stay on in power. We heard earlier from Plutarchos Sakellaris [former European Investment Bank vice president], who clearly, like yourself, is no friend of Syriza, that he thought that it would be better if Tsipras stayed in power, at least for a few months, to preserve some sort of stability. Do you think that s a good idea, or do we need new elections straight away? GH: A month ago my optimistic scenario was, and I guess still is, that the prime minister would finally realise that the structural reforms that he was, sort of, forced to sign are actually a good thing. And since he is a socialist somebody has to tell him that this is a socialist policy, because if you open up professions, if you fix the justice system so that they deliver justice quickly, if you fix the tax agency, if you allow a level playing field so you fight monopolies and oligopolies, this gives power to the people. This is exactly what you need for more democracy, you need checks and balances, you need the youth to have a chance. If he finally actually understands this, he probably can deliver the message to the Greeks. The Greek people are confused. The political parties in Greece over the last five or six years never managed to have a united front and that s why I think we are in the mess that we are now.

2 DM: But do you think we are getting into a position of a united front? You were in charge of the economic policies of Lucas Papademos. Reforms were tried there. And I m sure they were also approved, but they weren t implemented. Do you think we ve got a better chance this time? GH: Well, look, a lot of the reforms were implemented, let s not zero them. You know it s not enough to implement reforms, it s not enough to begin, you have to keep running them, because you can always pass new laws in the parliament and undo the reforms you have passed before. So for reforms to stay, to stick, the population has to own them, the population has to be behind them, and for that somehow the political system has to accept them and claim their good for the country. The Greek politicians haven t done it so far. So now this young fellow who people like, because he does not carry the burden of the past, has a chance actually to deliver. And who knows? That s what I call the optimistic scenario. DM: So you are still relatively optimistic despite everything. A lot of people are saying that this deal is not sustainable, because it s just adding more debt. Is the deal possible without debt relief? That is the question. GH: At this stage, the stage we are, yes, we do need debt relief. And when I say debt relief, debt relief that s acceptable to the other European countries. And the only thing that s acceptable to others is, I think, an extension of the existing loans, with a lower interest rate than they have, but not a haircut. That is something that I have proposed when I was a finance minister, we didn t have a chance to start talking about it, because we first had to close the review. We did close the review by the way, David, with the European Commission back in December, in the Eurogroup. Mr [Pierre] Moscovici, [European commissioner for economic and financial affairs] said Greece has done more than required to close the review and a lot more than any other programme country. It was the IMF, and the ECB lined with them, that didn t agree. I think that the IMF acted politically; it was a blunder on their behalf. They were watching the polls, they were seeing that Syriza was going to be the next government in power, and they wanted to keep their money. But they could have closed the review and kept giving the money, little by little, and they would have forced the new government to behave earlier on. We wouldn t have reached this situation, had they agreed, like the commission and the commissioner agreed back in December, to close the review. DM: That s a very good point. And you and I were both there in Athens about three weeks ago when Mr [Yannis] Stournaras, your predecessor, the previous finance minister, who is now the governor of the Bank of Greece, said that the Europeans had not lived up to their promise in November 2012 to produce some debt relief after you had produced a primary surplus, which of course you did last year. So aren t the Europeans partly to blame for dragging their feet about this debt relief issue, which as you say can only be done through a massive prolongation of the maturities? GH: Well, to be fair to the Europeans, I mean, Mr Stournaras has a point, but when the Europeans promised some debt relief, they promise their debt relief based on the primary surplus we delivered, yes, but they also demanded that we finished the reform. So the review was a bottleneck; we have to close the review. Now the Europeans came along eventually said Yes, you have closed the review, it was the IMF that turned out to bet the bad guy, the tough guy, in the end. DM: I ve just got a few more questions. We ve only got 10 minutes more in the conversation. I just want to divide it between the short term, the medium term and the long term, if I may. First of all a question about the short term. You ve got this repayment deadline staring us in the face, on Monday the ECB is due 3.5bn and also the debts to the IMF need to be cleared as well, that s about another 3bn for Thursday. And the Greek government needs a bridging loan. Do you think that is likely to be done, there s a lot of politics that need to be involved in a very small space of time?

3 G. H.: I think that this was resolved today, that the green light was given so that the EFSM [European Financial Stability Mechanism] would provide a loan, a 7bn loan to the Greek government. I think even the UK government agreed to it, because there was enough collateral on this loan. D. M.: So you are pretty confident that this deadline will pass? G. H.: That s why Mr Draghi actually today increased the ELA [Emergency Liquidity Assistance] to Greece by 800m. He even made positive statements that Greece could start using quantitative easing as well from Monday on. So I think the green light is been given to the ECB. The ECB is fairly confident that it will get its money on Monday. So we re moving forward. DM: One of the points you were making a few weeks ago in Athens, was that, if the ESM [European Stability Mechanism] could make use of the period of low interest rates in the market, the ESM could actually borrow a great deal at low interest rates and fix Greek debt costs at a low interest rate for the next 30 years. Clearly you would see a swap of the loans, which at the moment are held by the ECB, they would be swapped to the ESM. Do you think that kind of creative financing will take place over the summer? GH: No I don t expect this to happen over the summer. What I will say, what makes sense for Greece to do, and some other European countries too, is to transform their floating rate debt into fixed rate debt, because global interest rates are very low. And Greece can actually take advantage of that and fix its future obligations and future payments. It s only going to cost some basis points transforming it from floating to fixed. They ought to absorb that cost and have this benefit for many years, perhaps 30 years or whatever. Anyway there will be discussions on it, I m sure, when they finally close the deal with the Europeans, but it s not something which will be dealt with tomorrow. DM: And what about the medium-term prospects for the Greek economy? There are glimmers of light in the Greek economy. We have heard from the Bank of Greece that there some sectors which have actually reformed themselves and moved up the value chain. On the other hand, there are masses of SMEs which are doing very badly, with the banks being closed. When do you think the banks will be reopened, on the most optimistic possible assumptions? When can the Greek people see light at the end of the tunnel? GH: The most optimistic assumption, the most optimistic forecast of the banks opening, is Monday. And it actually has a high probability. Now the issue that you have mentioned about the SMEs being in trouble, yes, a lot of them are in trouble, a lot of them depend on the banks. The fact that the banks closed created additional problems. This bank holiday and the general capital controls are causing a much bigger recession this year than we had expected, a minimum of minus 3% growth, I would say. And which may continue into next year. What I would hope the Europeans will do, and generally the lenders will do, it to lighten up a little bit on the fiscal situation, not insist on a primary surplus of 1% this year and 2% next year. They ve got to bring down those targets, because the economy is in a recession. They shouldn t push it further down, they should allow it some breathing space, so it can stabilise. It has stabilised before as I told you. When I gave the ministry to Mr [Yanis] Varoufakis [who took over as finance minister in late January], we were growing and expected growth to be between 2.5-3%. We caused this, I mean the Greeks caused their demise right now where they are, but they need some breathing space so the economy can stabilise again. We would lose by then about two years of growth, but you know it could be done; it could be done. And I think the people could take it. DM: And, for the longer term, again on the most optimistic assumptions, when do you foresee the Greek economy once again growing, let s say between at 2 and 3%, and some inroads being made into this frightfully high unemployment rate of 25%?

4 GH: Now I would postpone it to The earliest would be the second half of I would say average growth of 2-3% now is being pushed forward into the future. And the unemployment rate, you know, it began declining in 2014, I think it dropped by almost 2 percentage points, but now it s started rising again. Unemployment is a lagging indicator, it follows the economy. First the companies have to get their act together. We will see which companies survive and then you will see unemployment being affected. There is a lag of about at least a year. DM: We obviously need some concessions from the creditors as well as the debtors. We have spoken about debt relief, you said it can t be a haircut, it has to be through a prolongation of the maturities. The German chancellor, Mrs Merkel and [finance minister] Mr Schäuble have had quite a lot of criticism in their own country for having dealt roughly with Greece. What do you say to that, as the man who was previously in the government and made way reluctantly for Mr Varoufakis, do you think the treatment that Germany handed out to your country was justified? GH: Look, one should be objective about this. If you re German and you have an added responsibility as a large country to ensure that the eurozone survives, you ought to kind of show an example and tell people to follow the rules. And the German point of view is well known. It s very explicit: follow the rules, and then you re fine. I mean the Greeks did not follow the rules over the last six months and that s why we are paying a high price now, and so I wouldn t blame the Germans or anybody else. I think the Greeks in Greece suffer from a huge deficit of self-acknowledgment. They have to look deep into themselves, and understand that the Greek problems are due to the Greeks themselves and not to foreigners. They d better start accusing themselves of what they are doing and start looking into the mirror, and when they blame politicians they should say to themselves I voted for them. It was not somebody else that voted for that politician. So I think there is too much of a blame game going around, and the least thing that the Greeks can do is start blaming others, they d better look at themselves. They d better get their act together, my compatriots and myself, and fix this country, because a lot has to be fixed. D.M.: Well that is a very European, but also rather democratic answer, Prof. Gikas Hardouvelis, professor of finance and economics at the University of Piraeus and of course a former finance minister. I m just going to ask you one last question, because we are going to ask our listeners around the world to dial in again in about three minutes, we do have your successor Mr Varoufakis on the line afterwards actually in about three or four minutes, but just before we do that I d to say a big thank you, to you, Gikas for giving such a wonderful series of responses. My final question to you is that you are obviously a Greek patriot and you re a citizen who cares deeply about your country, could you imagine that there could be, not straight away but at some stage, a kind of government of national unity in Greece to pull the ship around? We ve had a lot of different political constellations in the last few years. Is it not time for some type of grand coalition to do what is needed to be done and could you be part of it? That is my question to you. GH: I think a coalition is a likely scenario. Right now the governing party is actually able to govern, because the opposition has voted in parliament for the measures. I think the opposition would not like to be in the government, because they have paid a big price for the measures they took in the past and they d like Syriza to get a taste of those measures as well. However a coalition government, I think, is perhaps needed. I think the Greek population is finally learning its lesson. Even people full of leftist ideology are realising that reality is what it is, and that they cannot hope for something they do not deserve or they haven t earned. Mr Varoufakis, since you have him next in line, has all sorts of stories as to why Europe hasn t followed the right Keynesian policy. But frankly he misled his prime minister, and he brought the country to its knees over the last six months. He had a chance to keep that growth going, had he closed the deal, but he didn t realise that you need to be credible, you need to bring in

5 cash into this economy. There was just complete disrespect for the supply side of the economy throughout these six months. So what can I say? DM: Well we ll see what happens next. But thank you for being very statesmanlike. Thank you, for being very European. And very democratic, the fact that the Greek people need to take responsibility themselves. So I d like to say thank you Gikas Hardouvelis for being on the line with us. We look forward to the next conversation with you. And I d like everybody around the world who s listening to also metaphorically thank Gikas. You can put the phone down please everybody, because you need to dial in again for the next conference call. So Gikas Hardouvelis in Athens, thank you very much for being with us and good luck in Greece. This is David Marsh from OMFIF saying Good-bye. Good-bye everybody.