Is This Greek Deal for Real?Nick Malkoutzis
Since the summer, Greece has been waiting anxiously to find out when it would receive the next portion of its bailout tranche from the euro zone and the International Monetary Fund. In the early hours of Tuesday, Nov. 27, the suspense ended: Greece’s lenders confirmed that they would release the money next month after devising a scheme to reduce Greek debt to sustainable levels. If successful, the debt deal will confirm that good things do actually come to those who wait.
When euro zone finance ministers and IMF Managing Director Christine Lagarde gathered in Brussels at around lunchtime on Monday, it was their third such meeting in two weeks. Previous attempts to agree on a formula to reduce Greek debt had foundered on substantial differences of opinion and on macroeconomic technicalities. This time, there was enough flexibility to secure an agreement that, despite being a compromise, has the potential to help Greece exit the crisis that has devastated its economy, upset its political system, and churned up social turmoil.
“Greece could probably not have expected more from the agreement, which gives Greece some breathing space to effect structural reforms that should have been implemented at the beginning of the crisis in 2010,” says Dimitris Sotiropoulos, a political science professor at the University of Athens. “This will also allow the government to adopt measures that will help the rising number of unemployed Greeks.”
The formula for reducing Greek debt has several parts, which include a 1 percentage point reduction on the interest rates charged by other euro zone members to lend to Greece as part of the country’s first bailout. This means Athens will have an annual servicing rate of just 0.69 percent for the initial loans from its partners—substantially cheaper than the rate some of the rescuers must pay for their own borrowings. Euro zone finance ministers also decided to extend by 15 years the maturities on loans from Greece’s second bailout and to defer interest payments for 10 years. The European Central Bank will return to Greece any profits it makes from Greek bonds it purchased on the secondary market in 2010 and 2011. Greece will embark on an effort to buy back privately held Greek bonds at substantially reduced prices; the goal is to withdraw them from the market.
The aim is to reduce Greek debt to 124 percent of gross domestic product by 2020 and then—should Greece be producing the fiscal performance its lenders want—the euro zone may consider further actions, including a possible write-down of loans, to reduce the country’s debt to “substantially lower” than 110 percent of GDP in 2022. Given that Greek public debt is projected to reach 189 percent of GDP next year, the potential for such a substantial debt reduction is a boon for the country.
“A new day begins for all Greeks,” Prime Minister Antonis Samaras said in a brief statement outside his office in Athens moments after the deal was announced in Brussels. One of his coalition partners, PASOK leader Evangelos Venizelos, said the agreement was a chance for Greece to make a “new start.”
Much as the debt pact provides beleaguered Greece with new hope, it still must overcome some familiar problems if the formula is to have any chance of succeeding.
The Greek government is going to come under even greater scrutiny from its lenders—the so-called troika of the European Commission, European Central Bank, and the IMF—in order to qualify for bailout funds. The trio agreed to release by Dec. 13 only 34.4 billion euros ($44.38 billion) of the 43.7 billion euros Athens was due to receive by the end of the year. The remaining 9.3 billion euros will be released in three tranches at the beginning of 2013, but only after Greece has met bailout “milestones” that include the overhaul of its tax system.
Regular inspections by the troika in Greece have proved a source of friction since the bailout program began in May 2010, and the lenders are in no mood for leniency. As part of Tuesday’s agreement, Athens will have to place any privatization revenues into a “segregated” account. Money from projected primary surpluses, as well as 30 percent of any extra surplus achieved, will also have to be paid into this special account, which will be used to pay back Greece’s lenders.
Perhaps, though, the toughest challenge will be to overcome the debilitating effects of the recession, which since 2008 has led to Greece’s economy shrinking by about a fifth and unemployment passing 25 percent. The debt-sustainability analysis on which the euro zone ministers based their decision has not been published yet. In an appraisal published on Tuesday, JP Morgan estimates that the Greek economy would have to grow by about 4 percent per year from 2015 for the numbers to work out.
“While the projected growth rates are probably unrealistic, the more stringent conditionality has become necessary,” says Sotiropoulos. “This is the result of the reluctance of the Greek political elite over the last three years to change the country’s growth model and the resistance of the most privileged sectors of society to structural reform.”
The Greek economy is due to shrink by at least 6.5 percent of GDP this year and is forecast to contract by 4.5 percent next year, so a substantial turnaround is needed for the debt-sustainability scheme to work. The next loan tranche will contain €23.8 billion ($30.8 billion) to complete the recapitalization of Greek banks. That will boost the Greek economy but will not be enough on its own.
Moreover, given that Greece is expected to implement €18 billion of austerity measures over the next four years—a demand which stands despite Tuesday’s agreement—it is not clear where economic growth will come from. That wait will take even longer.