Grand bargain or wasted opportunity?
The agreement reached during the early hours of Saturday at the eurozone leaders? summit in Brussels is not yet the ?grand bargain? that many had advocated. The new deal to fight the year-long sovereign debt crisis in the eurozone seems to be a step in the right direction, albeit at great political and economic cost for countries such as Greece, Ireland and possibly Portugal.
Of most importance for Greece is the provisional agreement — which still needs to be confirmed at the next EU summit on March 24-25 — that the length of its loan repayments is stretched from three years to to 7.5 years. Moreover, the interest rates Greece pays for the EU share of the 110-billion-euro rescue arrangement is set to be lowered by 100 basis points, i.e. 1 percent, from about 5 percent today. The EU?s rates are significantly higher than those being offered by the IMF.
In itself, these two concessions will have an immediate impact on Greece?s capacity to service public debt. Over the extended repayment period of the loan arrangement, the interest rate reduction will save Greece roughly 6 billion euros. Equally, the decision by eurozone leaders to allow the EU?s bailout fund, the so-called European Financial Stability Facility (EFSF), to buy sovereign bonds on the primary market will potentially have positive consequences for Greece.
Why is that the case? Because the EFSF?s purchase on the primary market of bonds issued by a eurozone government ensures that Greece and Ireland can return to international capital markets with placements as soon as this year. More specifically, as Finance Minister Giorgos Papaconstantinou has repeatedly remarked, Greece will attempt to go back to the markets in the second half of 2011 or early 2012, seeking to sell bonds with longer maturities than the three- or six-month T-bills it is currently offering. Knowing that the EFSF would stand ready and have improved financial firepower to be a buyer of Greek debt in primary markets, could reduce pressure on future yield levels.
However, despite these positive and constructive developments, we should not get ahead of ourselves and assume that all is right and Greece is out of the woods. The hard part is yet to come and it will require adept political skills and delicate compromises on the part of the Papandreou government, its relationship with the troika in Athens and interaction with civil society.
Part of the new arrangement hammered out during the late-night negotiations in Brussels also included the government?s commitment to raise around 50 billion euros through privatizations. People should not fool themselves about how complex and conflict-laden the delivery of this objective will be.
Only a month ago, the troika proposed that Greece recalibrate its state assets and identify a list of privatizations, including land sales, in order to raise 50 billion euros of revenue to cut its public debt mountain. All hell broke loose in Athens: The government pointed fingers at the troika and pledged that such an intrusion on national sovereignty would not be tolerated. The troika?s proposals were ill-timed and caught the government off-guard, but the Brussels deal has made such a commitment an official policy goal for Athens.
Moreover, in order for the EFSF to become a buyer of newly issued Greek debt in the primary market, the government in Athens will have to negotiate and agree on a program with the European Union that includes ?strict conditionality.? In practice, this means that apart from raising unprecedented levels of revenue from an extensively reshaped privatization program ? something Greece has never achieved before — the government will have to apply strict conditionality to a number of highly contentious issues, such as a further overhaul of the state pension system, raising retirement ages, adjusting corporate taxation, adoption of automatic and binding national debt breaks, additional labor market reforms and continuing salary reductions in both the public and private sector. Put bluntly, more austerity is on its way to Athens. Combined, it is a high price to pay for softening the terms of last year?s Greek rescue package.
If the past months are any indication, signing up to such additional levels of conditionality is going to require full cabinet coherence, unprecedented message discipline and new energy levels to challenge entrenched special interests.
This is no time to assume that the worst is behind us. The sovereign debt crisis in the eurozone has not lost any of its intensity during the past 12 months. Just look at the political controversy and market reactions following the ratings downgrade for Greece and Spain by Moody?s this past week.
The various efforts to contain the crisis have been frustratingly inefficient and short-lived. But it appears that we are now moving from containment toward more constructive solutions. The repair work continues. The toolbox has been updated. Fasten your seatbelts in Athens.
* Jens Bastian is Visiting Fellow for the Political Economy of Southeast Europe at St Antony?s College in Oxford, UK, and Senior Economic Research Fellow at ELIAMEP in Athens, Greece