By N. Bellos
A fiscal “sword of Damocles”, which hangs over Greece’s finances in the form of an automatic spending cut mechanism, will mostly affect public sector wages and pension payments if activated.
The mechanism, dubbed the “cutter” by Greece’s political opposition and local media, was approved by the leftist government in late May 2016 following demands by institutional creditors, especially the IMF. Over the next three-year period, until fiscal 2018, the prospect of automatic cuts in state spending will exist in case the government fails to meet fiscal targets, especially primary budget surplus goals – 3.5-percent of GDP in 2018, for instance.
If activated, the “cutter” will seek 60-percent of whatever spending cuts from wages and pensions.
The 60-percent figure was disclosed in the text of a “technical memorandum” that details the measures of the primary text from the first review of the Greek program (third bailout), which was approved in principle by institutional lenders at a May 24 Eurogroup meeting. In the weeks afterwards, the Greek government also passed a bevy of “prior actions” to implement parts of a 5.4-billion-euro austerity package ratified in mid-May. The “cutter” was one such “prior action”.
Even more ominously, two separate mechanisms are included in the overall “cutter”: one being a recession clause, and another having to do with the costs associated from an ongoing Mideast refugee crisis plaguing Greece.
Terms of the current third memorandum entail intensified measures to collect tax arrears, with specific and binding targets cited over the coming months.
On the privatization “front”, another field where creditors have overcome practically all of Athens’ opposition over the past year, the memorandum delineates the timetable and process for transferring the portfolio of state-run utilities – especially ones related to energy – to the privatization fund, known as the Hellenic Republic Asset Development Fund (HRADF).
The next deadline for the Tsipras government is to fulfill prior actions ahead of a scheduled second review of the Greek program in the autumn.
The Commission has pressed Athens to accelerate reforms and implement agreed-to measures in order to avoid delays – such as the ones that plagued the first review – so that a second review is completed and a 2.8-billion-euro remainder of a bailout loan is disbursed.
