That was close, says Ken Wattret of BNP Paribas. Just before last Monday’s deal, the Greek government realised it was facing “a very disorderly, painful exit” from the euro – and it “stepped back from the brink”. Greece signed up to a deal that will see it begin negotiations over a third bailout package in exchange for more austerity and structural reforms.
After the country’s parliament passed some of the measures last week, its creditors signed off on €7bn of bridge financing, allowing Greece to meet a repayment to the European Central Bank on 20 July. That has kept liquidity flowing to Greek banks, allowing them to reopen this week.
But will the new deal last? A sensible deal, says The Economist, “would have put Greece on the path to sustainable growth and taken the prospect of Grexit off the table”. Unfortunately, all this contains is “the same old recipe of austerity and implausible assumptions”. For instance, there is “fat chance” of generating €50bn by selling off state assets, given that Greece has only managed to raise €3bn in five years of privatisations.
Structural reforms, such as forcing some cosseted industries to accept competition, will help, but the benefits won’t appear quickly. That just leaves “quasi-automatic spending cuts” if budget targets are missed. These would further undermine the economy. So the main danger, says Wolfgang Munchau in the FT, is that the economy will “remain trapped in a vicious circle for many years to come”.
A shrinking economy implies failure to meet deficit targets, which leads to more austerity – and even less growth, and a bigger debt pile – and so on. After some time, the Greeks could just give up and decide leaving the eurozone is less painful than endless suffering, says Munchau.
Is debt relief still on the table?
In any case, the deal could still unravel. The International Monetary Fund (IMF), which is financing part of the bailout, has said it won’t sign unless the Europeans agree to debt relief. It reckons that Greece’s public debt could hit 170% of GDP by 2022. The unsustainable debt pile needs to be reduced, it insists, but so far Europe has only agreed to think about extending debt maturities.
Yet in reality, debt is “a side-issue”, says Berenberg Bank’s Holger Schmieding in The Wall Street Journal. “Getting economic policies right matters much more.” For starters, note that Greece has already had “substantial debt relief”. Around 40% was slashed off the debt pile in 2012. Private bondholders took a haircut in 2012, while maturities and interest rates on the bonds held by other governments were extended and trimmed respectively.
The average maturity of these borrowings has been extended to 16.5 years with an average interest rate of 1.5%. No interest or principal on loans to eurozonegovernments has to be paid back before 2023. So the debt isn’t as bad as it looks.
Moreover, last year Greece was showing signs of gradually getting on top of its debt, continues Schmieding. It was on track for nominal GDP growth of almost 4% and the fiscal deficit was falling. But Syriza’s election dashed confidence and has plunged the country back into recession. If Greece now concentrates on pro-growth structural reforms, it will bolster confidence, investment and growth. If it shows signs of doing so, it should be rewarded with “further incremental relief”. But a haircut now will just “reward Syriza for the loony policies of the last six months”.
Whatever the discussions over debt relief yield, however, it’s hard “to see how the shattered relationship between the Greeks and their (northern) European neighbours will be repaired”, as The Economist points out. And the bigger tragedy, concludes Canada’s Globe and Mail, is the corrosive effect of monetary union: a project designed to hasten integration has merely created “resentments so deep and bitter that the continent is once again a breeding ground for extremist politics”.