It seems like ages ago now, but on Monday of this past week, Eurozone leaders in Brussels came up with a deal to give Greece another big aid tranche, while also taking concrete steps to lower its debt-to-GDP ratio.While no outside lenders agreed to actually rip up debt, they did agree to lower interest rates, extend maturity terms, and forego profits on some bond purchases.
Nick Malkoutzis, editor of the Greek newspaper Ekathimerini, has the best analysis of what just happened. Basically, there were some breakthroughs, but there are still some major design flaws. Greece has a hope, but it’s not there yet.
First the good. Some o the measures to reduce debt-to-GDP would have been “unthinkable” a few years ago.
Some positive steps – ones which were unthinkable for much of this crisis – were made in Brussels. For instance, the European Central Bank accepting to return the profits it makes from Greek bonds bought via its SMP program was a significant breakthrough. Apart from the fact that this move will help reduce Greece’s debt by an estimated 4.6 per cent of GDP, it also represents a realisation, albeit belatedly, that the eurozone’s central bank should not act like a private bank. While there are some well-founded concerns about diluting the ECB’s monetary purity, it remains an institution designed to protect the interests of its member states and there can be no situation in which it is in the euro area’s interests for one of the members to be bankrupt and teetering on the edge of political and social collapse but for its partners and central bank to be making a profit from it at the same time.
The decisions to extend the maturities and provide a repayment holiday on EFSF loans from the second bailout and to bring down to just 0.50 per cent above the Euribor rate the interest on bilateral loans from the first bailout are in a similar vein. They recognise that extraordinarily bad times require red lines to be shifted and compromises to be made.
Now the bad part. The future contingencies are still based too much on growth. Greece gets punished if the economy remains mired in its depression, which is perverse.
An extension of maturities and a zero interest rate would avoid the most obvious, but politically-charged, option of writing off part of the debt that Greece owes to its partners. It would also have the dual benefit of reducing debt to a level that is convincingly manageable, while linking future payments to the performance of the Greek economy: the more it grows, the more debt could be paid off. Instead, we have ended up with a scheme that will punish Greece should its currently collapsing economy fail to meet targets. Apart from the extra conditionality attached to further bailout loans and the fact that Greece is being asked to put all privatization revenues and money from primary surpluses into a “segregated account,” the eurozone has suggested that further debt relief may come in a few years time but only if substantial primary surpluses are being produced.
This defies logic, though. It has been accepted over the last few months by most analysts that a primary surplus has failed to materialise yet not due to a lack of fiscal measures but because of the ever-deepening recession. So, if the economic recovery fails to materialise or is slower than expected and primary surpluses prove elusive or smaller than expected, the eurozone’s reaction – according to Tuesday’s agreement – will be to deny Greece further debt relief, which could help spur investor confidence, economic growth and primary surpluses.
The problem, still, remains overly rose assumptions about Greece’s own trajectory, and the trajectory of the rest of the world. Furthermore, even more cuts are expected, which will make it even harder for Greece to grow and get further relief. So the inherent bailout/austerity trap remains.
When pooling together these factors and assessing the current climate, the Brussels debt deal appears to be far from the conclusive answer to Greece’s debt-related problems. There have been concessions on all sides and the potential is there for a more decisive intervention in the future. As things stand, though, it does not provide a cast iron guarantee that Greece will remain in the eurozone. It provides a flickering light at the end of the tunnel rather than total illumination and leaves a huge amount of work for Greece, and its partners, to do over the next few months and years. Will they succeed? Of that, we can be uncertain.