The cancellation of Wednesday’s special meeting of euro zone finance ministers, which was planned to rubber-stamp Greece’s latest bailout deal, shows that other euro zone members are increasingly bargaining harder with Greece, economists told CNBC.
The announcement of the cancellationwas followed by strong words from the rest of the euro zone about Greece’s political leaders. The need for written agreement to the new austerity measuresfrom all political parties in Greece is a key sticking point.
“It’s all part of the negotiations as we approach the final stages. I think European leaders feel that the system is less vulnerable to Greek default, so they are bargaining a bit harder, Riccardo Barbieri, chief European economist at Mizuho International, told CNBC Wednesday.
“It still makes sense to come to an agreement rather than have Greece default,” he added.
The European Central Bank’s long-term refinancing operation in December has helped prop up the European banking system, and made it less vulnerable. There is a growing feeling that much of the pain related to Greece has already happened. French banks, which suffered a sell-off late last year as the extent of their exposure to Greek sovereign debt became apparent, have already taken a haircut in the value of their Greek holdings.
“The market is more prepared for a Greek default,” Alberto Gallo, senior credit strategist at RBS, told CNBC Wednesday.
Greece’s current technocratic government, led by Lucas Papademos, was appointed last year. Elections are expected this year – and some of Greece’s political parties could use public opposition to austerity to gain votes.
Antonis Samaras of leading opposition party New Democracyhas been holding out against signing the bill, according to Reuters.
“I’m not sure Samaras has the same credibility (as other European opposition leaders). He’s campaigning for the upcoming election. I personally think that it’s time to put a bit less pressure on Greece in terms of imposing things that create distress in the real economy and concentrate on structural reforms. Having said that, Greece has delivered very little so far,” Barbieri said.
“They have to accept that they must deliver on reforms.”
Tax administration and public sector inefficiency are the most important reforms to deliver on, according to Barbieri.
“It has become evident that government approval or even passage in parliament of policy measures is insufficient to satisfy the demands of euro area countries. The government will have to be ready to implement measures ahead of the release of the financial support,” Antonio Garcia Pascual, chief Southern European Economist at Barclays Capital, wrote in a note.
However, the government has been unable to implement some of these key measures under the first program (e.g. additional pension cuts, and meaningful reductions in the minimum wage and public sector wage bill, to name a few). It is not clear whether the government will have the political capacity to implement some of these 'prior actions'.”
There is some sympathy for those who protested on the streets of Athens this week.
“Given the state of the economy and the psychology of public opinion, asking them to take more cuts in wages and pensions is I think the wrong policy,” Barbieri said.