The Corner

Greece ‘Saved’?

The latest Greek bailout deal is announced for the expected (but inadequate) €130 billion, and in some ways it’s a retake of the deal first proposed in July, but with some twists.

So, for example:

The Eurogroup also welcomes Greece’s intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece’s debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter’s debt service directly to a segregated account of Greece’s paying agent.

In other words, enter the escrow account . . .

 At EU Referendum, Richard North writes:

Off-stage could be heard banging, shuffling and muffled screaming from the fat lady, as she was bound and gagged, and bundled out the back door into a waiting van.

But the fat lady’s chance of a swansong has not yet disappeared. North turns to Reuter’s Felix Salmon for more:

The problem, of course, is that all the observers and “segregated accounts” in the world can’t turn Greece’s economy around when it’s burdened with an overvalued currency and has no ability to implement any kind of stimulus. Quite the opposite: in order to get this deal done, Greece had to find yet another €325 million in “structural expenditure reductions”, and promise a huge amount of front-loaded austerity to boot.

The effect of all this fiscal tightening? Magic growth! A huge amount of heavy lifting, in terms of making the numbers work, is done by the debt sustainability analysis, and specifically the assumptions it makes. Greece is five years into a gruesome recession with the worst effects of austerity yet to hit. But somehow the Eurozone expects that Greece will bounce back to zero real GDP growth in 2013, and positive real GDP growth from 2014 onwards…

[W]here’s all this economic growth meant to be coming from, in a country suffering from massive wage deflation? And under this pretty upbeat downside scenario, Greece gets nowhere near the required 120% debt-to-GDP level by 2020: instead, it only gets to 159%. And to make things worse for the Eurozone, the report explicitly says that under the terms of this deal, “any new debt will be junior to all existing debt” — in other words, there’s no way at all that Greece is going to be able to borrow on the private markets for the foreseeable future, so long as this plan is in place.

The cost of this plan is €130 billion right now, and €170 billion over three years, through the end of 2014; it just continues going up from there, with no end in sight. Remember that total Greek GDP, right now, is only about €220 billion and falling.

There is also, the Daily Telegraph’s Jeremy Warner notes:

A “tailored downside scenario”, which I have to say looks pretty optimistic to me, debt would fall much more slowly than hoped for reaching only 160pc of GDP by the end of the decade, rather than the 120pc the eurozone requires of Greece. In such circumstances, €245bn of bailout money would be required.

But back to Salmon . . .

Oh, and in case you forgot, this whole plan is also contingent on a bunch of things which are outside the Troika’s control, including a successful bond exchange…More to the point, the plan assumes that Greece’s politicians will stick to what they’ve agreed, and start selling off huge chunks of their country’s patrimony while at the same time imposing enormous budget cuts. Needless to say, there is no indication that Greece’s politicians are willing or able to do this, nor that Greece’s population will put up with such a thing. It could easily all fall apart within months; the chances of it gliding to success and a 120% debt-to-GDP ratio in 2020 have got to be de minimis.

Europe’s politicians know this, of course. But at the very least they’re buying time: this deal might well delay catastrophic capital flight from Greece, and give the Europeans more time to work out how to shore up Portugal if and when that happens. Will they make good use of the time that they’re buying? I hope so. Because once the Greek domino falls, it’s going to take a huge amount of money, statesmanship, and luck to prevent further dominoes from toppling.

And, always, there’s politics, try as hard as the euro zone’s chiefs might try to keep it out. Here’s Jeremy Warner again:

Already, polls published by local Greek media indicate that the centre parties (PASOK and ND, and in particular PASOK) are losing popular support hand over fist, so it matters not a jot that the two main coalition parties have signed up to full ongoing implementation after elections in April. In contrast, the parties further from the centre continue to gain popular support, and none of these have expressed support for the next programme.

 The programme also has to be approved by a number of national parliaments elsewhere in the eurozone. I won’t say this is a programme that can’t fly, because the eurozone has repeatedly defied the sceptics in holding the whole thing together thus far. But it is certainly a programme that cannot succeed, and only brings closer the day when Greece is forced out of the eurozone.


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