Rasmus Rueffer, representative of European Central Bank and one of the quartet of creditors, talked to Proto Thema newspaper in a very crucial moment for Greece, since in a few days the negotiation talks between Greece and its creditors will begin.
Mr. Rueffer said that “one of the most important, but also most politically sensitive items on the agenda of the first review will be the reform of the pension system”, “a system that is sustainable” which “can ensure that people will still be able to receive an adequate pension in the future, without unduly burdening the active workers”, while streesing that “The insufficient implementation of what has been agreed and legislated for is one of the main risks” for Greece.
Read below the full interview.
The two sets of milestones have been completed, but in a few days the review will start. What will the main challenges be? How optimistic are you that it will be concluded on time?
Many people were positively surprised by the recent, relatively smooth completion of the two sets of milestones. The Greek government demonstrated a certain degree of commitment to delivering on its mandate to implement the Memorandum of Understanding (MoU) which was agreed last August with the other euro area governments. I trust that this commitment prevails and that the first review will be concluded within a reasonable timeframe. There are several challenges, of course. One of the most important, but also most politically sensitive items on the agenda of the first review will be the reform of the pension system. It is important to emphasise that this is not just about achieving the agreed budgetary targets. It is about designing a system that is sustainable, meaning a system that can ensure that people will still be able to receive an adequate pension in the future,without unduly burdening the active workers. Thus, it is ultimately also an issue of social fairness, in particular to the younger generation.
Assuming that an agreement in the review is delayed, until when does the Greek state have cash to meet its obligations?
Despite the government’s efforts to improve the fiscal position, at this point, to function properly and support economic growth,the Greek governmentcontinues to need funds to cover its expenditures, which are in excess of the revenues raised. It is always possible to delay some public investment projects and thereby “buy some time”. Similarly, the government can further delay payments to private suppliers, thus running up additional arrears. However, without functioning public infrastructure and without being paid by the Government, it will be very challenging for the private sector to generate growth and jobs. It is, therefore, in the interest of the Greek economy, and society at large, that the review be concluded as quickly as possible and, looking to the future, that the fiscal targets be met.
You mentioned the need to reform the pension system. Since 2010 pensions have been cut several times already. What else will it take to make the system viable?
Indeed, a number of reforms of the pension system have already been undertaken. These reforms have achieved a notable improvement in the long-run sustainability of the system. Still, important issues remained unaddressed, such as the significant funding gaps remaining forthe coming two decades. Moreover, last year’s constitutional court ruling on past reforms implies there is a need for a fresh look at some of the issues. Pension reform is a very complex and highly technical issue,but in the end has direct consequences for everyone: those currently receiving a pension, those paying for these pensions and those expecting a pension at some point in the future. It is, therefore, important to find a solution that balances the different interests in a fair manner. At the same time, it has to be ensured that the design of the system provides adequate incentives for people to work, for businesses to create employment and for both to contribute to the system. This is not always the case now, with many retirees having made contributions for only 15 years while also benefiting from very generous early retirement provisions. For a system to be sustainable and fair, it is important to ensure a high degree of proportionality between pension payments and the contributions that were made during one’s working life. For several decades the Greek pension system didn’t observe this simple rule. On too many occasions, pensions were awarded on the basis of disproportionately high replacement and accrual rates, which are much higher than those the current generation of workers will receive. It is important to acknowledge that these challenges are in no way specific to Greece: all euro area countries have reformed or are reforming their pension systems to make them sustainable.
What are the main goals of reforming the tax code? Aren’t the Greeks overtaxed already?
The various MoUs, including the current one, contain reforms that aim to modernise the Greek tax system, thereby making it more transparent and growth friendly. The third programme includes various actions that aim to complete the needed reforms of the Income Tax Code (ITC). Equally important, the programmes have also led to a modernisation of the Tax Procedures Code, which has provided the tax administration with an improved set of tools. This sounds abstract and complex and to some extent it is. But, as with the pension reform, it has real consequences as it will allow an efficient and, above all, fair operation and implementation of the tax laws. Once properly implemented,these reforms, along with the setting up of an independent revenue agency, will ensure that the tax burden is shared fairly so that all contribute as intended. Currently, honest tax payers are penalised as tax rates may have to be higher than would be necessary in a situation where everyone contributed by paying their taxes.
Aren’t the privatisation targets too high? Especially now that the state’s shareholdings in the banking system have decreased substantially?
It is important to emphasise that the goal of the privatisation programme is not only to generate revenues for the state; more importantly, it can be seen as a major structural reform measure. By bringing in private sector expertise, governance, as well as financing, the value of these assets can be enhanced, thereby maximising the benefits that the Greek society can get from them. Bringing in foreign investment has the added advantage of relieving the tight financing constraints which the Greek economy currently faces. Furthermore, the part of the revenues that can be used for growth-enhancing investment will directly support growth and employment without creating additional debt. The main parameters of the privatisation programme were agreed by European leaders, including the Greek Prime Minister, at the Euro Summit in July 2015. One of the parameters is that the monetisation of the assets should generate, over the life of the new European Stability Mechanismloan, a targeted total of €50billion. This and the other parameters of the agreement provide the guideposts for our discussions with the authorities.
Assuming that things proceed as planned, the discussions regarding debt relief will start at some point. What do you think the relief will look like?
Euro area leaders clearly acknowledged that there are serious concerns about the sustainability of Greek debt. They also expressed their willingness to consider measures to improve debt sustainability after a successful first programme review. It is worth pointing out that Greece has already benefited from the debt relief granted by private investors in 2012 and moreover, euro area Member States have effectively provided significant additional debt relief to Greece through the very concessional terms of the financial assistance programme. This implies that debt servicing needs are already lower for Greece than for some other euro area countries with lower nominal debt levels. Yet, despite these short-term mitigating factors, serious concerns about long-term debt sustainability remain. It is up to euro area Member States to decide the appropriate modalities of any further debt measures. They have made it clear that a nominal haircut is not among the considered options. Moreover, the room for further cuts in interest rates is limited because rates on major parts of debt are already very close to the respective lender’scost of borrowing. Further room exists with respect to grace and repayment periods, however. This reduces the effective debt burden, both by further reducing the present value of debt and by ensuring a reasonable profile of annual gross financing needs over time. Member States may also consider conditional measures which directly affect the debt service burden, similar to arrangements under the previous programme. For this purpose, they could use amounts equivalent to the profits on the Eurosystem’s holdings of Greek government bonds, which have been distributed to them by their national central banks.
At some point, the Greek programmes will end. Do you think that there will there be any conditions attached to the debt relief in order to avoid Greece returning to the flawed practices of the past?
Any debt measures granted by Greece’s European partners can only work if the Greek government does its part to ensure debt sustainability. This means continued prudent conduct of fiscal policy. Equally important, the government has to create conditions for the economy to grow, through structural reforms and growth-friendly budgetary policies. Healthy growth is the best recipe for making debt sustainable. It is in everyone’s interest to ensure that any debt measure is matched by commensurate efforts by the Greek government. If this cannot be guaranteed, concerns about debt sustainability are likely to remain and the positive confidence effects so important for growth are likely to remain elusive.
What are, in your view, the conditions for the International Monetary Fund(IMF) to participate in the programme?
I cannot speak on behalf of the IMF. Let me only say that, from our side, we believe that the IMF’s role in the Greek assistance programmes has been very positive. The IMF has considerable expertise in designing and monitoring financial assistance programmes. The IMF’s full participation would, therefore, be highly desirable.
What about the reform of the labour market? When will it be discussed?
Unemployment, and in particular youth unemployment, continue to be at clearly unacceptable levels in Greece. The social and economic costs are immense. A key objective of the programme is,therefore,to create jobs and bring these people back into gainful employment. It does so by laying the foundations for a return to robust and sustainable economic growth. But growth will only take off and benefit those currently unemployed if firms are willing to hire them. This is where the labour market reforms come in. One of the objectives of these reforms is to remove obstacles that prevent firms from hiring. Let’s assume that a company registers an increase in orders, but is not sure whether this is just a blip or a more lasting trend. If this company knows that it can also adjust downwards the size of its workforce if it turns out to have been a blip, then it is much more likely to make that hiring decision. Similarly, allowing some flexibility to adjust the terms of employment to respond to firm or sector-specific developments can be important. At first sight,not allowing this flexibility may be seen as being more beneficial for workers. However, this is true only for those who already have a job and disregardsall those who are deprived of the possibility of being employed in the first place.
What are the main risks for Greece in the comingquarters in your view?
In my view, it is clear that insufficient implementation of what has been agreed and legislated for is one of the main risks. Legislating for measures is only a first step. Without proper implementation they remain ineffective. The official programme reviews can help by monitoring programme implementation,but they cannot be a substitute for genuine commitment on behalf of the authorities, at all levels, to implement the programme. A more serious risk to the programme would of course be if the government were to no longer even legislate for the measures as required by the programme or if it were to take stepsto unwind some of these measures.
Some people in Greece claim that, with the recapitalisation of the banks, €300 billion of assets ended up in the hands of foreign investors for only €5 billion. What would you say about that?
Just looking at the asset side of banks is certainly too narrow a perspective. The overall economic value of a bank to its owners is determined by the balance between assets and liabilities.In that context, you also need to take into account that the effective value of many of the banks’ assets, such as loans to firms and households, has been reduced by the derailment of the Greek economy in 2015. Regarding the process, let me just point out that the public offering was a competitive process following an independent and conservative asset quality review and stress test undertaken by the ECB and Bank of Greece.
This was the fourth recapitalisation of the Greek banks since 2004. Will there be a fifth one?
As you know, the comprehensive assessment was very rigorous, and the adverse scenario used was appropriately conservative. There is thus no reason to speculate about another recapitalisation. The recapitalisation was necessary because the Greek economy deteriorated significantly in the first half of 2015; the best guarantee that there will be no fifth one is for growth to recover based on the implementation of the programme.
In your view, what constitutes an efficient market for non-performing loans (NPLs), to which Greece has committed in its MoU?
The high level of non-performing loans is an indication that the financial and economic crisis has not been fully resolved yet. This constitutes a drag on growth going forward. Over-indebted viable firms cannot flourish as they are weighed down by legacy debt. At the same time, non-viable firms divert resources from more productive uses. In principle, banks should focus on identifying profitable lending opportunities. Instead, they have to deal with non-performing legacy loans. Thus, tackling the NPL issue has to be a key policy priority. There is no quick fix and, given the magnitude of the problems, all potential tools need to be made available to banks. The majority of NPLs can be expected to be dealt with on banks’ balance sheets. However, the possibility of a transfer of ownership should also be allowed if this is the most efficient way to deal with a certain portion of the NPL portfolio.
Coming from the top technocratic institution of the Troika, do you have the feeling that you are dealing with the last reserve of the Greek political system? What happens if this government falls?
Your readers will understand that the ECB is not a political institution and is not taking sides. We are doing and we will continue to do our job based on the agreed MoU independently of political considerations.
What is in your opinion the main obstacle that prevents the Greek economy from returning to growth despite six years of aggressive adjustment?
The inadequate implementation of the agreed reforms is indeed the biggestthreat toyour economy. It is important to understand that the reforms envisioned under the programme will play an essential role in changing those past practices that led to the current state of affairs. In 2014 we saw that a recovery and a return to international capital markets are possible. Unfortunately, that rebound was cut short by subsequent developments. A main obstacle at the current juncture is overall uncertainty. Without certainty about the way forward, firms will remain reluctant to invest and hire. This crucially includes certainty about programme implementation. It is important to have a stable economic policy that can guide expectations. Establishing a track record of strong ownership of the measures agreed seems to be the most realistic way to achieve sustainable growth going forward.
Do you believe that sufficient steps have been taken by the successive Greek governments to reduce and modernise the public sector?
Progress has been made, but as a Greek you know much better than me that a lot more could be done to increase the efficiency of the public sector, which is necessary in order to improve Greece’s competitiveness. Notwithstanding the current economic hardships, Greek taxpayers are being called upon to make increasing contributions to finance their government. In return, they deserve to receive high-quality public services that are provided in an efficient manner. This implies that resources need to be channelled to where they are most needed, and government employees should have the right incentives for good performance and for acquiring the necessary skills and competencies. Progress has been made in many of these areas, but more could be envisaged and, once again, the ultimate test of these measures lies in their actual implementation.
What is a timeline of future developments if the programme is implemented with consistency?
Assuming full programme implementation, we hope to soon see some of the pay-offs from the various reforms that have been undertaken by the government. The various structural reform measures should make it easier for firms to expand their businesses in growth sectors and for new firms to emerge. Investment and hiring should pick up. Banks would be in a better position to support this process. This scenario relies on a certain degree of stability, which a continued track record of full programme implementation could to some extent create. The completion of the first review will be a major stepping stone in this process. On the ECB’s side, the Governing Council will consider the re-instatement of the credit rating waiver (allowing Greek bonds to be pledged as collateral for monetary policy operations in spite of their low credit rating) and the eventual inclusion of Greek bonds in the public sector purchase programme once the conditions are right. With the overall economic situation improving, the government should also be in a position to progressively and gradually remove remaining capital controls and to eventually tap financial markets again. This, after all, is the ultimate precondition for successfully exiting the current programme.
Since March, when you became chief of the ECB’s Athens team, you have been engaged in endless talks that have lasted till the early hours of the morning for several days in a row. Did you ever feel stressed?
Of course, there have been times when my team and I have been under a lot of stress, but this is unavoidable given the importance of the task. It should be noted though that those who cannot find a job or those who don’t know how to pay their bills at the end of the month or those who cannot provide their children with the things they need are the ones who are really stressed. And this is why we have to ensure that the reforms are implemented. We have to ensure that the Greek economy gets back on track in order to generate jobs and enhance social fairness.
