Tuesday April 21, 2015 Search
Weather | Athens
14o C
09o 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)  
Dijssebloem expects deal with Greece in coming weeks
Euro-area debt levels surge to record, led by Greece
ECB studying curbs on Greek bank support
Greek markets slide on reports ECB planning to restrict bank funding
Juncker urges Greece to step up effort in debt talks
European Commission President Jean-Claude Juncker urged Greece on Tuesday to step up efforts to strike a deal with its international creditors, warning that talks were not advanced enough to...
UN urges Europe to put asylum at center of Mediterranean debate
GENEVA - The UN refugee agency on Tuesday urged European leaders to do more to help Greece and Italy cope with the migrant crisis in the Mediterranean and to put protection of people at the ...
Inside News
BASKETBALL
Panathinaikos recovers to beat CSKA for 2-1
Three-pointer master Panathinaikos had the last laugh at the end of Game 3 of its series with CSKA Moscow on Monday winning 86-85 and reducing the Russians' lead to 2-1 in the best-of-five p...
GYMNASTICS
Petrounias wins gold in Europeans
Lefteris Petrounias won his first gold medal in a European Artistic Gymnastics Championship on Saturday finishing first in the rings at Montpellier in France. Petrounias was impeccable in th...
Inside Sports
COMMENTARY
IMF needs to correct its big Greek bailout mistake
The Greek government's mounting financial woes are leading it to contemplate the unthinkable: defaulting on a loan from the International Monetary Fund. Instead of demanding repayment and fu...
COMMENTARY
Tragedy in the Mediterranean
Every time we in the West see yet another video of an atrocity committed by Islamic State or Boko Haram and express our abhorrence, and every time we are shocked to read of a boatload of mig...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Dijssebloem expects deal with Greece in coming weeks
2. Juncker urges Greece to step up effort in debt talks
3. UN urges Europe to put asylum at center of Mediterranean debate
4. More than 120 migrants reach Greek shores, a day after fatal sinking
5. Greek municipalities outraged by state move to use funds
6. EU proposes doubling rescue effort, schedules crisis meeting on Thursday
more news
Today
This Week
1. Greek government's popularity takes a hit as talks drag on
2. Tragedy in the Mediterranean
3. Two men accused of migrant smuggling face prosecutor over deadly shipwreck
4. No ferries on Labor Day as seamen take industrial action
5. Silence is not an option
6. ECB studying curbs on Greek bank support
Today
This Week
1. Quarantine for Greek bank subsidiaries in neighboring countries
2. Greek finance ministry hits back at German newspaper report
3. Time to get serious
4. Putting off payments led to Q1 budget primary surplus
5. Obama calls for flexibility in Greek reform talks in brief exchange with Varoufakis
6. Greece denies report that it is preparing for debt default
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2015, H KAΘHMEPINH All Rights Reserved.