Give the Third Greek Bailout a Break
The Greek crisis is so thoroughly mythologized that the third bailout, which the Greek parliament is set to approve Thursday, has already given rise to its own myth that it uselessly piles more debt onto the shoulders of an already over-indebted nation. In reality, the latest package will reduce Greece's medium- and long-term debt burden.
The 85 billion euros ($94 billion) offered to Greece in the new package will help drive Greece's nominal debt-to-gross-domestic-product ratio up to 200 percent, from about 175 percent today. Yet in a policy brief, William Cline of the Peterson Institute for International Economics shows that this added debt will be "largely an optical illusion."
Over the next three years, Greece is to repay 35.9 billion euros in debt to the International Monetary Fund, euro-area central banks (including its own), the European Central Bank and private creditors. Another 7 billion euros are needed to clear arrears. So, about half of the new aid will replace existing debt, making much of the headline GDP ratio increase a temporary blip.
In addition, the replacement debt will be cheaper for Greece to service. The average interest rate on debt to the European Financial Stability Facility is 1.65 percent, compared with 3.7 percent for the IMF. That amounts to debt relief, not an increase in Greece's burden.
A further 25 billion euros are allocated for bank recapitalization. Pouring that money into Greek banks will increase the government's ownership interest in the four major lenders, which hold 90 percent of the country's banking assets, to about 90 percent from the current 40 percent. The government is then expected to pay off the recapitalization loans from privatization proceeds -- the 50-billion-euro fund established to sell off state assets, including the now more valuable banks.
This arrangement inflates the size of the aid package, Cline writes, creating unfavorable optics. In reality, the deal builds in a source for repayment of the extra 25 billion euros. If the privatizations are carried out as planned, this debt will disappear.
After eliminating these elements of the rescue package, just 17 billion euros would be left, lent at a more favorable interest rate than Ukraine is getting from its IMF loans. Indeed, Cline calculates that with the package, Greece's debt-to-GDP ratio will fall to 151 percent by 2024; without the new deal, the IMF estimates that figure would be 167 percent.
Moreover, contrary to a widespread belief, Greece will not have to shoulder the full weight of its debt burden anytime soon. The discounts it receives on existing debt, as well as in the new package, mean that its interest payments will average 3.7 percent GDP until 2020 -- only slightly more than Italy's 3.4 percent -- and then 4.3 percent until 2024, the same cost that Portugal pays to service its debt.
Cline points out, like others before him, that the IMF's warnings about the unsustainability of Greece's debt are based on projections that go beyond 2030. It makes little sense to get hung up now on write-offs to alleviate a problem that won't come up for another 15 years, especially since there is no way to make reliable forecasts. Today, for example, economists expected Greece to announce that its economy shrank by 0.5 percent in the second quarter of 2015. Instead, the Hellenic Statistical Authority reported a 0.8 percent expansion.
Sure, this third rescue package goes further than previous deals in curtailing Greece's economic sovereignty. It also imposes automatic cuts on government spending if targets aren't met. In short, the terms of the new bailout insult the Greek government with (well-deserved) mistrust, after it tried for six months to run the country like a student protest. They don't, however, inflict the economic damage many commentators describe.
Tsipras appears to have realized that there are no other options: His country has no access to financial markets, couldn't afford the interest rates if it did, and has to rely on rather generous, and cheap, EU financing. Nobody is offering more money: The IMF is eager to stay out of the bailout, using its projections of debt unsustainability as a pretext. And Greeks don't want the drachma back.
Just as German and French banks didn't, contrary to myth, get the bulk of the bailout money previously handed to Greece (by Cline's count, they got 70 billion euros out of a total of 225 billion and lost another 30 billion to a haircut imposed in 2012), and just as there was, again contrary to myth, no way to avoid austerity, Greece is not hurting itself to please its German torturers now. Instead, the Tsipras government is being relieved of the burden of making policy and urged to concentrate on honest execution, which has been Greece's problem from the start.
That's a lot to ask of any nation, but perhaps not too much. The unexpected second-quarter growth figure shows that Greece is not doomed to fail. The third time may yet prove lucky, especially if Tsipras's conversion to the bailout is sincere and his Teflon-like popularity holds.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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