Greek political leaders agree on basic directions of cost cutting measures and policy actions

As expected, the leaders of the three coalition parties and FinMin did not provide much detail on cost cutting measures, following a 3-hour meeting held yesterday. FinMin Yannis Stournaras stated that “we had a very good discussion and agreed on the basic direction”. The leaders of PASOK and Democratic Left stressed that no additional measures will be imposed for 2012, beyond those already agreed and included in the updated MoU, while there should be no horizontal measures for 2013-14.

It is noteworthy that MoF sources appeared later less optimistic noting tat “we will strive to avoid new measures for 2012” adding that “we hope that horizontal cuts will not be required for the next two years”. Same sources note that measures of €8.1bn have already been identified, while the remaining €3.4bn will stem from state-controlled organisations, municipalities and mergers of state entities. The finalisation of cost cutting measures of €11.5bn is expected at a follow-up meeting to be held next week.

Reportedly, political leaders also agreed Greece to focus on privatisations and negotiation of program adjustment extension to be conducted at the highest political level with EU partners. They also requested MoF to prepare two alternative medium-term adjustment programs, one for Greece’s current obligation to meet fiscal targets by 2014 and a second extending fiscal adjustment by 2016. The two plans will be discussed at the next meeting of political leaders ahead of the troika visit to Athens expected on July 24.

Our take is that FinMin approach appears more realistic, yet less optimistic, taking into account the prevailing uncertainty over the feasibility of total cost cutting measures and the reluctancy of several ministries to proceed to specific proposals along with the potential non-positive reaction by troika to certain measures. From a political perspective, it is positive that political leaders appeared aligned and agreed on the basic directions, yet detailing and approving measures is the first serious crash test for the coalition government.

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