Realistic debt restructuring needed to give Greek deal a chance

Cliff Taylor: A huge job lies ahead in order to implement tax hikes and spending cuts

Because the Greek economy has deteriorated so much, the  targets have been changed. Photograph: Reuters

Because the Greek economy has deteriorated so much, the targets have been changed. Photograph: Reuters

 

After all the dramas of the last few months, the outline agreement between Greece and its creditors on its third bailout programme came almost as an anti-climax. Without any of the megaphone diplomacy and threats of July, both sides now seem to agree that a deal valued at up to €85 billion is pretty much done. Getting it to work, however, remains a major challenge.

The deal must still be politically passed in Athens and across Europe, of course, though there are no signs that it will be thrown off course. The extent to which the Greek government’s approach has changed seems to have surprised both the officials from the institutions and Berlin itself. Now, assuming the Greek parliament and other EU parliaments approve the deal, the deadline of August 20th, when a €3.2 billion repayment is due to the ECB, will be met.

The Tsipras government, having reversed course during the dramatic weekend in mid-July, seems to have decided to accept the terms being put forward, rather than scrapping about the detail.

You are left wondering what all the fighting was about. Could a similar deal not have been struck in the spring? The eight-month delay since the election has taken a heavy toll in economic and social damage.

Because the Greek economy has deteriorated so much in recent months, the economic targets have been changed.

GDP will fall by 2-3 per cent this year, so budget targets for this year and next will be changed. Greece will be expected to achieve a lower surplus for 2016 and 2017 on its budgets, before debt payments, than had been expected. This appears more a recognition of reality than a concession by the creditors.

Shrinking economy

The priority will be regaining stability. Here, the banking system – badly damaged – is central. Because economic conditions have deteriorated, the bank balance sheets are weighed down with bad loans.

This means they need new capital. Much of the initial major tranche of cash likely to be released to Greece by lenders will go to an initial recapitalisation of the banks, as well as paying the Greek state’s bills.

Turning Greece around is a huge job. The cuts threaten to make recession worse, which would move targets further out of reach. To have any chance of working, Greece will need its debt restructured and a significant delay on repayments.

Achieving this would also be some payback for Tsipras for taking on reforms, but can it be sold to the sceptical public in Germany, Finland, the Netherlands and in the newer member states?

What debt relief might look like has not formed part of the initial agreement – the creditors countries say they need to see the programme being implemented first. Without a realistic restructuring package, regaining access to the financial markets in the three-year time horizon of the programme looks impossible.

To be successful, bailout programmes need to quickly restore stability and then clearly set the economy on a sustainable path. Achieving this in Greece remains a huge challenge.

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