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The Greek debt deal: Goodbye uncertainty, hello uncertainty

By Nick Malkoutzis

For Greece, the underlying theme of this crisis has been swapping one set of uncertainties for another. In fact, sometimes the uncertainties have been exactly the same, simply repackaged and rebranded. From George Papaconstantinou's “loaded gun on the table,” to the first bailout in May 2010, from the mid-term fiscal plan in the summer of 2011 to the October 27 haircut agreement last year, from the PSI and second bailout early this year to the European assurances ahead of this summer's elections: each development has promised stability, continued membership of the euro and better days ahead; each has crumbled into an empire of dust.

Now, hopes are being pinned to the Brussels debt deal agreed in the early hours of Tuesday morning. The immense relief at an agreement being reached is both understandable and justified. The prospect of the eurozone and International Monetary Fund failing to find any common ground on how to make Greek debt sustainable would have led to potentially devastating economic and existential implications for the single currency area and Greece. However, as this relief subsides, it becomes more evident that this deal takes a stab at providing a definitive solution to Greece's debt problem but falls short, leaving the sword of Damocles dangling over the country. Even if the debt reduction program goes according to plan – and there are doubts whether it will, especially due to questions over the bond buyback scheme - Greece will still have to contend with a debt of 124 percent of GDP in 2020. It is also doubtful whether enough has been done to remove the niggling doubts about Greece’s future in the minds of investors, who are so necessary to helping change the course of the Greek economy. JP Morgan referred to the Brussels pact as a moment of "creative ambiguity."

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 percent of GDP, it also represents a realization, 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 percent above the Euribor rate the interest on bilateral loans from the first bailout are in a similar vein. They recognize that extraordinarily bad times require red lines to be shifted and compromises to be made.

However, as things stand, the Brussels agreement looks too much like a compromise struck to overcome short-term turbulence rather than secure long-term stability. Even though the latest steps mean that Greece has the longest average maturity of debt anywhere in the world, at 20 years, it’s doubtful whether Tuesday’s agreement puts the country in a substantially better position to service it. There was an opportunity this week to break the vicious debt-austerity-recession cycle that is threatening to drag Greece and then others into a vortex. It had been well-documented before the quickfire round of Eurogroup meetings this month that a decision to extend maturities on loans to Greece and reduce their interest rate to zero and indexing loans to the country’s growth rate could reduce the country’s debt to around 100 percent of GDP by 2020. This would be achieved without event bringing up the issue of writing the 48 billion euros for the capitalization of Greek banks on the books of the European Stability Mechanism rather than as national debt - an option that disappeared from the agenda over the last few months due to objections by the AAA-rated countries.

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 materialize yet not due to a lack of fiscal measures but because of the ever-deepening recession. So, if the economic recovery fails to materialize 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.

This goes to the heart of the matter, which is that Greece’s partners expect it to begin producing primary surpluses from 2014, with the 2016 figure coming in at 4.5 percent. Greece produced surpluses of about 4 percent between 1994 and 1999, as it prepared to join the euro. But this was accompanied by a growth rate of about 3 percent that rose steadily during this period thanks partly to a conducive global environment. As things stand, it is difficult to see how this can be matched over the next few years. Given the economy has shrunk by about 20 percent over the last five years and is due to contract by at least 4.5 percent next year, it is going to take a remarkable turn of events to see Greece produce growth rates of about 4 percent from 2015 onwards in order to ensure the debt reduction program meets its target in 2020 and primary surpluses are of the magnitude that would nudge the eurozone into providing further debt relief.

This feat appears even more unlikely when one considers that there is nothing in Tuesday’s agreement that addresses lenders demands for Greek to keep up with the breakneck pace of austerity. A minimum of 18 billion euros of cuts and revenue-raising measures are to be implemented over the next four years, with automatic adjusters kicking in if Greece fails to meet its targets. Balancing the demands for further intense fiscal adjustment with the absolute need to grow seems an impossible task.

Then, there is the question of how all this can be matched with the fragile political and social situation in Greece. A Marc opinion poll for Alpha TV this week suggested that almost two thirds of Greeks do not want early elections. This is encouraging for the coalition government but at the same time the window of opportunity for keeping voters on its side and winning doubters around is small. The same survey, and others, show that SYRIZA - with its idea of rejecting outright the troika’s demands - is gaining support steadily and is Greece’s most popular party. Golden Dawn, meanwhile, is a growing menace socially, as it feeds off instability by creating more of it. In this vice-like grip, the coalition will need to show ample political skill and tangible signs of improvement to resist being crushed.

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.

[Kathimerini English Edition]

ekathimerini.com , Thursday November 29, 2012 (16:09)  
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