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We’re pretty used to this Greek bailout discussions/announcements being treated as big nothings that don’t actually accomplish anything, other than delaying the reckoning even longer.And with Monday night’s latest agreement to disburse more cash to Greece, we’re getting a lot of the same reaction, in part because there was no actual agreement to reduce the nominal amount that Greek owes, something that would seem necessary for the Greek government to get back to sustainable financing.
But in the aftermath of the deal, some people are coming to the conclusion that actually something was accomplished.
Sky News business reporter Ed Conway has a good blog post up pointing out that in reality Greece’s debt was reduced. By lowering the interest rate Greece owes on its loans, and vastly extending the maturities of them, for all intents and purposes, Greek debt levels have been reduced significantly.
Greece is so deeply mired in the credit quagmire, and so trapped in a depression worse than the Great Depression, that, eventually, its lenders will probably have to go the whole hog and write off principle amounts of debt. But for the time being, the best they can do is to subtly reduce the interest and maturity element of what’s owed.
The subtlety is necessary here because to have completely forgiven the debt ahead of the German election would have been political suicide for Angela Merkel.
And, on balance, you have to say that what was agreed last night was, at least, a step in the right direction. As I’ve written before, at some point Greece’s enormous debts will have to be written off – whether through agreement or default. The sooner Europe faces up to that, the better.
Richard Barley at WSJ comes to a similar conclusion:
Greece isn’t off the hook: Cash disbursements are to be phased, with €34.4 billion due in December and the remainder in three payments in early 2013, tied to the achievement of further reforms. The International Monetary Fund is holding off further lending until the debt buyback is done. And a lot needs to go right if Greece is to achieve a debt-to-GDP level of 124% in 2020, falling below 110% in 2022. Success hinges on a return to growth, the achievement of a sustainable primary budget surplus before interest payments and implementation of privatizations.
The risk remains that Greece’s economy continues to deteriorate as a result of continued austerity, inflaming political tensions and undermining support for the government. But this deal and the implicit promise of further debt relief to come—German Finance Minister Wolfgang Schäuble Tuesday said more measures to cut Greek debt could be considered once the country hits targets on its primary surplus—strengthens the position of Greek Prime Minister Antonis Samaras and sends a positive message to the markets that European leaders are committed to keeping Greece within the euro zone.
This is in keeping with what we’ve argued is the big theme of the entire Eurozone this year. A lot of accomplishments have been made (most notably a much more robust ECB) and the financial markets have reflected that (See: Italian, Spanish, and Greek yields all dropping).
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