Greek labor reform vote could have worldwide impact

Two weeks ago, Greek Prime Minister Antonis Samaras declared that Greece would run out of cash on Nov. 16, which why it's so critical that a decision on sending further aid to Greece is made at the upcoming meeting of euro zone finance ministers on Nov. 12.

Before a decision can be made, though, Greece's troika lenders (EU, IMF, ECB) have demanded that Greece pass controversial labor reforms — to which some factions of parliament are staunchly opposed.

The vote is set to be close, as Roubini economist Megan Greene noted this morning:

Have we ever witnessed such a close vote in the Greek parliament on important measures during the crisis as that which we'll see next week?

This morning, Finance Minister Yannis Stouranaras tried his best to reassure reporters, saying he was "fairly confident" that the vote would pass.

However, as Kathimerini reports, the governing coalition is still facing dissent in the ranks — including one politician who has already defected from the coalition over the vote — that could tip the scales in the other direction:

On Wednesday, only 148 of nearly 180 coalition MPs supported the government’s privatization bill. The bill, which paves the way for the sell-off of public utilities, passed because not all 300 deputies voted.

Junior coalition partner Democratic Left, which did not back the privatization bill, has repeatedly stated that it will oppose the reforms unless changes to labor regulations proposed by the troika are withdrawn. At the same time, PASOK chief Evangelos Venizelos faced dissent within the Socialist party on Thursday, as an MP disengaged himself from the party and another five deputies threatened to reject the measures.

BofA strategist Max Leung warned clients in a note this morning that "the risk of a negative vote is real."

The most recent obstacle to the vote has been raised by a Greek court, which yesterday said that the reforms may be unconstitutional to begin with, rendering a vote insignificant.

Deutsche Bank strategist Jim Reid called it the biggest story of the day on the Europe front yesterday:

Back in Europe, the main headline was that the Greek Court of Auditors sees the pension reforms demanded by the troika as unconstitutional, potentially derailing the government’s efforts to push through its EU13.5bn austerity package through parliament next week. The Court of Auditors, which vets Greek laws before they are submitted to parliament, said planned measures could be against constitutional provisions including the “principles of individual dignity and equality before the law” (Reuters).

The article does say however, that it’s not the first time the court has expressed reservation on draft bills, citing a finance ministry official. Broader equity markets shrugged off the headline, but the Athens Composite equity index closed down 5% on the day, and is now down 13% on the week.

The other big issue — one that's been around for years — is debt sustainability, which became even more glaringly obvious earlier this week when Greece unveiled a budget that forecasts 189.3 percent debt-to-GDP in 2013.

That could bring a lot of internal strife among Greece's creditors, who disagree on how to pay for a further Greek bailout, back to the forefront of the debate, according to Societe Generale strategist Vincent Chaigneau:

The new budget numbers unveiled on Wednesday are somewhat astonishing. The Debt/GDP ratio is now seen peaking at 192% in 2014. Compare this to the IMF’s previous worst-case scenario that had a peak at 171%. The IMF won’t pay its share of the next tranche unless it can be reassured that the debt can return to a sustainable path. While the IMF may be convinced that Greece needs to be given two more years (2022) to reach the 120% target, even that will be challenge.

The IMF supports OSI, i.e. haircuts on official creditors (but not the IMF itself). Yet European governments look very much opposed to forgiving debt. The Greek parliament has just approved (narrowly) a law that will give the government flexibility to privatize public utilities. Speeding up privatisations will help, but that won’t be enough.

Buybacks of the PSI bonds (€63bn outstanding), along with interest rate reduction and maturity extension on official loans, currently seem the preferred route for reducing the debt load. But who will fund those buybacks? Most likely that will imply new official loans, which will make the exposure of the official sector to Greek credit risk ever bigger.

The stakes are high, and many think Greece and its international creditors would all be foolish to ultimately fail in putting together a deal for Greece, especially with German elections only a year away.

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