A general rule emerged from the financial crisis that originated in the USA a few years ago: If a financial instrument is too complicated to understand, then you’d better start worrying about how safe it is. So, when one of the world’s leading economists, Paul Krugman, writes of the deal for Greece agreed by eurozone leaders on Thursday, “If you aren’t confused, you aren’t paying attention,” then perhaps we need to put the champagne on ice.
Thursday was undoubtedly a landmark moment for the European Union and the single currency. It was never an inevitability that eurozone leaders would arrive at a deal. When you have 17 leaders with 17 different electorates and myriad domestic concerns to juggle along with worries about the future of the euro, there can never be a guaranteed outcome. Nevertheless, the eurozone chose on Thursday the road to a possible solution rather than the path to an almost certain dissolution. The danger has not been dispelled but more time has been bought.
Laying Eurocentrism aside for a moment and looking at the deal from a Greek point of view, the most pressing question, if not the only one, that comes to mind is: Will this be enough to save Greece? The simple answer is: No.
It will not be enough because, first of all, Greece has to do what it can to save itself and what we have seen over the last 18 months or so has not been a convincing attempt at self-help. But beyond that, it is clear that while sitting on a megaton of debt that could go off at any minute, Greece will not be able to reach safety without some considerable assistance.
What Athens needed from the eurozone deal was an agreement that lightened its debt load, gave it longer to meet its financial commitments, provided it with access to loans for as long as it cannot return to the markets and a source of investment that could help drive growth and job creation in the depressed Greek economy.
Thursday’s deal ticks all of these boxes but it appears the level of assistance is far from as comprehensive as officials suggested in the hours after agreement was reached. The eurozone certainly came through in terms of the funding that Greece needs for the next few years. Athens still had 45 billion euros from its first (110-billion-euro) bailout outstanding, which it will receive. Another 109 billion euros is being added to this. So, Greece will receive 154 billion euros by 2014. The eurozone has also agreed to lower its interest rate for the new loans from 4.5 to 3.5 percent and to give Greece a minimum of 15 years to pay back the money.
There’s no doubt that the new loan package is a huge amount of money, but when you start to break down the figures and see how it will be allocated it’s clear that it does not give Athens very much financial wiggle room at all.
According to an analysis by the Wall Street Journal’s Charles Forelle, the largest chunk (38.3 billion) will go toward covering the deficits that Greece is expected to accumulate over the next three years, another 20 billion will be allocated for recapitalizing Greek banks, 20 billion more will be used by Greece to buy back its own debt, 35 billion will be spent on collateral for use in the bond exchange, while another 32 billion will be used to cover the Greek government bonds that mature by 2014. Another 38 billion euros is being set aside for “other” needs, which include paying debts accumulated by the public sector. It seems that every last cent has been accounted for before the loaning has even started.
The 20 billion euros set aside for bond buybacks will be made to work in Greece’s favor as the eurozone is intending this tranche to be used to buy 32.6 billion euros of Greek debt at a market value of 61 cents on the euro. This will lead to a reduction in Greece’s public debt, currently at some 350 billion euros, of 12.6 billion euros.
Through their trade group, the Institute of International Finance (IIF), banks have agreed to take part in a bond exchange, which should help reduce Greece’s debt further. Bondholders will have a choice of four options to swap paper that matures between now and 2020. According to the IIF’s calculations, this will shave another 13.5 billion euros off the Greek debt. The European Central Bank, which owns 48 billion euros in Greek bonds, will not take part in the scheme. “The plan doesn’t reduce [Greece’s] giant debt stock very much,” writes Forelle. “It is projected this year to be around 160 percent of GDP, and the 13.5 billion reduction from bond swaps and the 12.6 billion from the buyback total 26.1 billion, or around 12 percent of GDP. A chunk off a very large mountain.”
The one unknown variable in the Greek rescue plan is the commitment to creating a new European “Marshall Plan.” The reference to this scheme in the final text of the leaders’ agreement was fairly vague but it seems that it will be a scheme aimed at providing Greece with the money and know-how to execute infrastructure and development projects in a bid to stoke growth and knock the economy off the recession axis it is currently spinning on. The scheme, however, will have to be substantial in size to have a discernible impact on Greece’s fortunes.
The Guardian’s economics editor Larry Elliott suggested that private sector involvement through bond swaps is “not nearly enough to solve Greece’s solvency problem, unless of course the European ‘Marshall Plan’ proves as generous as that announced by Harry Truman in 1948, which was worth 5 percent of US national output.”
There is another aspect to the agreement that doesn’t affect Greece directly but which does have implications for the debt-ridden country. The eurozone leaders reaffirmed their commitment to bring down public deficits in all eurozone countries that are not receiving bailouts to below 3 percent of GDP by 2013 at the latest. Greece will have to agree in September to a new set of austerity measures and structural reforms as part of its deal but the commitment to low deficits in other countries has raised concerns that since a growing number of EU countries are facing debt problems and growth is scarce, there will be not be enough fuel for a recovery throughout the eurozone.
“So demand will be depressed in both the crisis and non-crisis economies; this will lead to a vigorous recovery through… what?” writes Krugman in the New York Times. “The Serious People are determined to destroy all the advanced economies in the name of prudence.”
In a less dramatic mood, Elliot writes, “This looks less like a game-changer and more like Austerity Lite, a rather more sophisticated version of muddling through.” On the receiving end of such a complex assistance package, muddling through may be about as good as it gets for Greece.