The Corner

Greece: The Monday After

According to Sarkozy, the Greek financial crisis has been “solved”, while the IMF’s Lagarde claims that “spring is in the air”.  Well, political and financial folk have to say such things, but, even so, let’s hope the Gallic duo is right.

Writing in the Daily Telegraph Liam Halligan is not so sure:

There are still two serious and wide-ranging sets of problems not captured in the Sarkozy-Lagarde analysis.

 The first concerns economics. This debt write-down, together with continued adherence to a brutal austerity program, is supposed to slash €100bn from Athens’ €350bn outstanding sovereign debt pile, moving the Greek government away from its current 160pc debt-to-GDP ratio and reaching its EU-mandated ratio of 120pc by 2020.

That’s all very well on paper yet, under the cover of Friday’s announcement, the Greek national statistical authority said that the recession during the last quarter of 2011 was deeper than initially forecast, amounting to a staggering 7.5pc GDP drop. The Greek economy will likely shrink for a fifth straight year in 2012, stagnate in 2013, modestly expand only the year after. Even this grim trajectory assumes a relatively steady and robust global economic recovery.

If Greece meets all the economic conditions demanded of it over the coming years then, under the terms of this latest deal, it is guaranteed aid, ensuring its debt financing needs until the end of 2014.

 Yet Greek adherence is a heroic assumption. The country’s business and consumer sentiment are on the floor. Private sector credit is extremely scarce, which can only add to the economic malaise. Unemployment is meanwhile soaring, pushing 20pc, with around half of young Greeks out of work.

 In a bid to make their numbers add up, the “troika” of the IMF, the European Central Bank and the European Commission has allowed itself to inhabit a parallel universe where Greece is “almost” out of recession. When that is proved to be wrong, as it will, the Greek debt predicament will turn out to be much worse than anticipated.

These economic realities suggest the political backdrop to this debt-swap is also likely to deteriorate.

Indeed, but if I had to guess, it’s the politics that could bring everything crashing down.

Here’s Halligan, again:

Greek elections are due in April or May. No agreement has been secured from opposition politicians that they won’t attempt to renegotiate the terms of the “austerity program”. That could obviously lead to the funding package being withdrawn. As the screw turns, and the Greek economy remains locked in stagnation, the potential for ever more serious social unrest will obviously escalate. Very real questions could be asked, surely, about the future of Greek democracy.

Then we must consider the political realities across the rest of the eurozone, too. Last week’s debt swap, for all the rhetoric about “hammering” the private sector, effectively shifts the bulk of Greece’s remaining sovereign debt into public hands – namely taxpayers in the eurozone and IMF members contributing to the bail-out. Try as it might, the “troika” has been unable to generate quite enough economic fog to prevent that fundamental truth becoming widely known among the broader European electorate. That’s why, leading backers of this desperate effort to maintain the euro in its current form could find their support politically impossible to sustain.

 Sarkozy, for instance, is in line to win 27pc of the vote in the first round of the French election on 22nd April, according to the latest polls, just 2 percentage points behind Francois Hollande. In a straight second-round battle between these two front-runners, though, Sarkozy is seriously lagging, polling just 45pc, compared with Hollande’s 55pc. Hollande, of course, is far from committed to further support for Greece. That, in fact, is one of his major pitches to the French electorate. So the possibility of a Hollande victory, and an unravelling of this package, simply cannot be ignored.

And, then of course, there’s Portugal:

Continued high yields on Portuguese sovereign debt suggest bondholders don’t trust bigger eurozone economies not to follow the Greeks towards default.

Indeed they don’t, and the nature of the Greek bailout (in which private sector bondholders were effectively subordinated to official lenders) is only likely to make matters worse.


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