Tuesday Jan 27, 2015 Search
Weather | Athens
13o C
7o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Greek deal leaves Europe on the road to disaster

By Clive Crook

If Europe’s new plan for Greece succeeds, nobody will be more surprised than the politicians who designed it. At best, the arrangement is a holding action, one that fails yet again to deal with the much larger confidence crisis facing the euro area.

The deal announced on Tuesday starts with private lenders. Their representatives agreed to accept even bigger losses on Greek government bonds than previously discussed. The bonds’ face value will be cut by 53.5 percent, and they’ll pay a low interest rate, starting at 2 percent then rising later. Altogether, this reduces their net present value by about 75 percent, far more than deemed necessary just weeks ago.

If enough private lenders go along, that triggers the inter-governmental side of the plan: new official loans to cover Greece’s ongoing budget deficit and replace debt coming due. The terms include a lower interest rate on bailout loans as well as various other kinds of European Union taxpayer subsidy, folded in with greater or lesser degrees of stealth. The European Central Bank and national central banks, for example, will pitch in by channeling back to Greece the “profits” they have made on Greek bonds bought at deep discounts to face value. The International Monetary Fund is going to take part, too. Exactly how still isn’t clear.

If too many private lenders opt out, it’s back to the drawing board. Ditto if voters in Greece force the government to renege on promises to cut the minimum wage, make advance debt- service payments into an externally monitored account, change the constitution to prioritize debt repayment, accept oversight of public accounts by an on-site team of EU officials, and more.

That’s only a partial list of what might still derail the agreement. Even if it sticks, its designers don’t sound confident it will work. An official analysis leaked to the Financial Times discusses a “tailored downside scenario,” which, to many observers, looks more like a plausible central case.

In this projection, Greece postpones the structural changes -- such as a lowering of wages -- needed to make its economy competitive. Fiscal adjustment and privatization are delayed. The government’s dependence on official loans grows, and its debt burden surges higher. The debt trajectory would be “extremely sensitive to program delays,” the officials conclude, “suggesting that the program could be accident prone, and calling into question sustainability.”

Sounds like business as usual. All through this crisis, the EU has chosen to keep muddling through, never doing quite enough to resolve the problem, infusing each round of subsequent crisis-management with high political drama. Advocates of this method argue, with a particle of justification, that it’s working. Unilateral default has been avoided and pressure has been brought to bear on Greece and others to push ahead with economic reforms that were long overdue.

If there is some intelligent principle behind this approach, rather than mere flailing incompetence, it would sound like this: “Let’s build this manageable problem up into a crisis capable of vast destruction that we might be unable to control. That will create the fear needed to force some real improvements in economic policy.”

Panic is what first turned an EU liquidity crisis (where governments struggle to borrow money) into an insolvency crisis (where the burden of debt settles on an unavoidably explosive path). This financial metastasis works through interest rates. If rates stay high enough for long enough, they can make solvent governments insolvent. When panic gripped the markets recently and bond yields surged, the solvency of Spain and Italy -- plainly capable of servicing their debts under conditions of no panic -- was called into question. It beggars belief that the EU is willing to let the fear of a calamity on such a scale persist, when there’s no need.

But it has been willing, and still is. The EU’s own financial officials doubt the new program will work. Greece may end up defaulting unilaterally -- the panic-maximizing event. Lately finance ministers have actually entertained the idea of a Greek exit from the euro as a way of bringing further pressure to bear on the government. Are plans in place for that contingency? Take a guess. If it happens, and bond yields spike again, there’s no firewall to protect the rest of the system. Europe’s banks are still undercapitalized and the European Financial Stability Facility is at best a third as big as it might need to be.

Greece is small enough for the rot to be stopped right there. Add in Europe’s other two acutely distressed economies -- Ireland and Portugal -- and the problem is still manageable.

Greece’s debts, official and privately held, should be written off. Until its government can get to a primary budget surplus or renew its access to market borrowing -- for which it needs some economic growth -- Europe should provide official financing on terms that won’t kill the economy. Euro exit must be avoided: Wages will have to fall, but dumping the common currency for a devalued drachma opens too many new channels of risk. The EU should stand ready, if need be, to do all this for Ireland and Portugal, as well.

In any event banks have to be recapitalized and the EFSF greatly enlarged. If all this were done, the risk of renewed panic would subside, and Spain, Italy and the EU as a whole would be moved back from the brink of disaster. The cost to euro-area taxpayers is not small, but it’s nothing compared with the crash they will suffer if this game of chicken with financial markets goes wrong.

What part of this doesn’t Europe understand?

[Bloomberg]

ekathimerini.com , Thursday February 23, 2012 (13:08)  
Greek bonds continue post-election plunge
Mixed reaction from big investors to Greek election result
Turk-Cypriot says gas search should stop until Cyprus solution is found
Bank stocks lose 23 pct in just two days
Greek coast guard search for missing ferry passenger
Coast guard vessels and helicopters continued to search for a missing passenger from a ferry from Crete that docked at Piraeus shortly before 7 a.m. on Tuesday. There had been no sign of him...
Serres police seek thieves of contraband smokes
Police in Serres, northern Greece, were on Tuesday seeking the thieves that stole more than 100,000 packets of contraband cigarettes from a customs authorities warehouse in a break-in believ...
Inside News
BASKETBALL
Basket League favorites survive challenges on the road
PAOK consolidated its position in the top three of the Basket League with a triumph at AGO Rethymnou on Saturday, while Olympiakos and Panathinaikos emerged victorious from their tough away ...
SOCCER
Olympiakos overcomes depleted OFI at Iraklio
Easy though it may seem, Olympiakos’s 3-0 win at depleted OFI Crete was rather difficult on Saturday, but was enough to keep the Reds on top on Saturday, as they have maintained their two-po...
Inside Sports
COMMENTARY
Greece, where everyone´s a winner
Whether a tradition or simply a bad habit, we have trouble finding a loser in any electoral race, a party leader who will openly concede defeat without trying to mitigate it with excuses. Th...
EDITORIAL
Political faux pas
Democracies have rules and institutions that must be respected and served by all who represent them. Most people can appreciate that politicians who have worked hard for the past two-and-a-h...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Greek bonds continue post-election plunge
2. Mixed reaction from big investors to Greek election result
3. Turk-Cypriot says gas search should stop until Cyprus solution is found
4. Greek coast guard search for missing ferry passenger
5. Serres police seek thieves of contraband smokes
6. Bank stocks lose 23 pct in just two days
more news
Today
This Week
1. Greek Elections 2015: Forming a government, Part 1 | LIVE
2. Greece, where everyone's a winner
3. Three days of mourning declared over death of two Greek pilots in Spain
4. Greek uncertainty weighs on low-rated eurozone bonds
5. Political faux pas
6. Europe stocks fall from seven-year high; Greek bonds drop
Today
This Week
1. Greek Elections 2015 | LIVE
2. SYRIZA heads for historic victory but without majority
3. Greek Elections 2015 | LIVE
4. Greeks fork out nearly 5 pct of their incomes on telecom services
5. Unsupervised voting
6. QE exclusion a ‘de facto Grexit’
Advertiser Link
SMART WATER Project: Outputs and conclusions of the final conference
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2015, H KAΘHMEPINH All Rights Reserved.