Wednesday, 28 November 2012

Greek Bailout Remains a Ticking Time Bomb

Prime Minister Antonis Samaras sounded a triumphant note after Greece was awarded 43.7bn euro in delayed loan instalments during the small hours yesterday.

In an emailed statement he said, “Greece managed to win back its credibility… it put the foundations in place for the Greek debt… to become sustainable again.”

Some people dispute these claims. The leader of the radical left opposition Syriza, Alexis Tsipras, yesterday reiterated his argument that all forecasts are slippery in the volatile global economic climate. “Two years ago they were telling us that the goal for a viable debt was 120 percent of GDP, now they are telling us it could be 124 percent, tomorrow they may say 130 percent.”

Documents seen by the Financial Times seem to confirm this view. An article run by the newspaper today reveals that the debt would be closer to 115 percent of GDP in 2022, rather than the “significantly lower than 110 percent” foreseen by the Eurogroup. Finance Minister Yannis Stournaras said in an afternoon press conference that the FT estimate was based on an outdated chart, and that adjustments equivalent to 2.7 points of GDP had later been made. 

The money released yesterday represents instalments of Greece’s second bailout loan due since May, when the country went into back-to-back elections. Its loan was frozen along with its austerity and reform programme.

Of the 43.7bn euro,9.3bn will be released next year, following a tax reform. The bulk, 34.4bn, is to be released immediately, in a fortnight. 23.8bn of this will recapitalise banks. The rest will go to state salaries, pensions and suppliers, many of whom haven’t been paid in as much as two years.

The eurozone spent two weeks deliberating on how to deem Greece’s debt as viable, in order to be able to release the money. The International Monetary Fund, which is bailing Greece out along with the European Union, had deemed the debt unsustainable after the economy shrank more than expected this year (recent figures by the Greek Statistical Service revised the recession from a forecast figure of about four percent to seven percent of GDP by the end of the year). This means that Greece’s economy is not thought to be strong enough to reduce the debt over time, only to roll it over indefinitely. It would condemn Greece to a perennial Sisyphian task of rolling the debt uphill, only to see it roll back to the bottom. Sustainability consists of the firm prediction that the boulder will roll down the other side of the hill. As economist George Pagoulatos put it to The New Athenian, the debt would overtax an “anaemic” Greek recovery after 2014, and it therefore “traps the economy in an equilibrium of very low growth.”

The ultimate challenge to the eurozone, which is now Greece’s main creditor, is to forgive a chunk of the capital they have lent Greece. But that would have to come from the pockets of European taxpayers. They are not in a forgiving mood and fear that greater concessions to bigger eurozone debtors like Italy might follow.

For the moment, the Eurogroup has managed to make Greek debt look sustainable on paper by tinkering with interest charged on that capital. The eurozone has lowered it from 1.5 percent to half a point, and offered a ten year moratorium on interest premiums. It also extended the maturity period on Greece’s bailout loans by fifteen years.

Two further things were offered. The European Central Bank will forego profit margins on Greek bonds it bought at a discount. It will now not charge Greece the original face value of those bonds when they mature, but something closer to the discount price it paid, which is about two thirds of face value. Greece will be also be allowed to use some of its bailout money to buy back some of its own bonds on open markets, at the discounted rates at which they are now trading. This means that if Greece sold a bond for 100 euro, it could now buy it back for less than half that amount.

All of these measures theoretically cut Greece's debt by 20 points of GDP and bring it to 124 percent of GDP in 2020, which, if true, is already a concession of four points by the IMF. But this will only hold true if Greece sticks to the programme, which it has a poor track record at doing, and if the international environment doesn't adversely affect it. These are two big ifs. Greece already has 25 percent nominal unemployment, and is looking at deeper recession and joblessness for another year, possibly two. Its latest austerity measures, voted into law this month, take effect on January 1. Growth initiatives, on the other hand, need time to mature. Given that things will get worse before they get better, it is quite possibly that Syriza, which has led the five month-old government in the polls for at least a month, will accede to power before long. The party says it will ultimately uphold the bailout loans, but will tear up the austerity memoranda. Figuring out what that means in practice may take months. The smooth running of the Greek programme should not be taken for granted, or set by creditors as a precondition. Doing so sets a political time bomb ticking.

The Eurogroup said in its statement yesterday that it is “committed to providing adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.” That seemingly unequivocal statement still contains countless uncertainties and trap doors. 

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