Fresh package unlikely to ensure salvation of stricken country

Tue, Feb 21, 2012, 00:00

ANALYSIS: EUROPE LAST night appeared set to finally back a second EU-IMF bailout for Greece: an agonising effort riddled with risk and uncertainty. Even if the long-delayed deal is done, the country’s fate will be in the balance for a good many months to come.

The reality is this – with Greece now in its fifth year of recession, hardly anyone believes the latest rescue will ensure the stricken country’s salvation.

Europe may well have run out of patience with the political class in Athens, but the EU authorities feel duty-bound to give the country one last chance. However, the use of an escrow account for bailout funds and deployment of full-time EU inspectors to monitor the rescue hardly smacks of confidence.

The anxiety remains that there is too little international money in play to achieve debt sustainability. Whether Greece’s discredited leaders have sufficient political capital in the can to foist yet more austerity on their weary people is also in doubt. The antagonism between German and Greek leaders makes matters only worse.

While the immediate danger of a crippling default next month may be averted, a general election looms in April and a new swathe of deep budget cutbacks is certain to heighten tensions on the street.

Yet, this most difficult of deals presupposes that Greece won’t reach safe harbour for years.

Even if the undeclared objective is to postpone the evil day of truth until the rest of the euro zone has pulled out of crisis, there can be little certainty that things might work out that way.

It follows, therefore, that a new deal may win but a little breathing space for Greece and Europe.

After weeks of dire warnings to Greece from Berlin, The Hague and Helsinki, the rhetoric softened as finance ministers arrived yesterday in Brussels. But the bulk of a bailout and debt restructuring scheme remained to be pinned down. Each individual element interlocks with all the others, adding layer after layer of complexity to the initiative.

Looming over the effort is the concern that the combined impact of a €130 billion loan package and a €100 billion voluntary debt write-down will still leave Greece with its national debt well above the target level of 120 per cent of national output by 2020. That figure would still be twice the EU limit of 60 per cent, but it might just give Greece a fighting chance of survival within the euro zone.

The concern for weeks, however, was that the debt might remain around 125 per cent of GDP after the bailout.

This created a “funding gap” for Greece, fuelling talk of a European Central Bank contribution to the bailout to make up the difference by foregoing profits on the Greek bonds it holds or by redistributing the profit back to Greece. The maths were always a little fuzzy, but the anticipation was that the eventual deal would come close enough to the target.

That was then. While economic forecasting in a situation such as this is inherently speculative, a new assessment by the EU-IMF “troika” indicates the situation is even worse than feared. By saying Greek debt might still be stuck at 129 per cent of GDP by 2020, the troika raised the risk that the deal would miss the target by miles.

Every percentage point of debt relief in this context costs billions of euro, meaning there are no painless means of achieving targets. Cue the opening of yet another strand in the talks, this time over a contribution from national central banks, which hold Greek bonds just like the ECB.

The problem in all this is that it introduces into the equation yet more uncontrollable variables. This is crucial, for the success of the debt-swap itself is predicated on an overwhelming majority of private creditors stepping forth to take a haircut of up to 70 per cent on their receivables.

With the judgment of bondholders still to come, any deal in Brussels would herald the beginning of a process rather than the end. Moreover, the Greek government must itself proceed with a long list of “prior actions” outstanding from its first, unsuccessful bailout before a single cent is handed over.

The vice tightens.