After a year of seeing false dawns in every euro summit communiqué, the markets finally got the second Greek bailout right: the reaction was muted, cautious, distrusting even. There was nothing to cheer about.
As it is, the bailout (here’s the bailout statement issued by eurozone finance ministers after an epic 14 hours of talks) and forced cut in the value of bonds held by banks and others, is being regarded as a sort of default (a Clayton’s default?) anyway, but not one that plunges markets into the unknown.
It was probably for that reason that all major European markets fell (after most Asian markets had risen after the announcement yesterday) and US markets were cautious. Gold and oil rose, the euro rose, then dipped. The Dow hit 13,000 for the first time since May 2008, then retreated to end the day slightly down. And the Australian dollar, a good global barometer for “risk on” investing and confidence, sold off slightly overnight as investors worried about the deal working.
The general reaction was along the lines of “what’s next” and when’s the next roadblock. The detail of the €130 billion deal tells us a lot: no benefit to the Greek people, a lot of benefit to the banks, even though they take a “loss” of 53% on the current value of their bonds (70% on the nominal value). They get made good, the Greek people get nothing, except the prospect of not defaulting and leaving the euro for another year.
But that’s all based on the €130 billion being enough. As the Financial Times and others have reported, there is considerable doubt among the financiers of the bailout that it will be enough. A leaked “troika” document prepared for the ECB, the European Commission and the IMF suggested the bailout deal is based on some heroic assumptions about Greek growth. If the Greek economy fails to return relatively quickly to growth (2.3% in 2014, the deal assumes), Greece could need €245 billion, nearly twice the bailout amount.
That reflects the simple maths of austerity: the more Greece cuts its spending, the worse its growth and the higher its debt:GDP ratio. The goal of the revamp, to get Greek debt down from the 160% of GDP to 120.5% by 2020, is simply too optimistic: the depressed Greek economy won’t grow and generate the income and tax revenues needed in the eight years to sustain that fall. Greece could still face a debt burden of 160% of GDP in 2020, meaning the €130 billion of bailout money and other spending since May 2010, will have been wasted.
As one senior bond market figure observed, this is one big exercise in make-believe.
According to the Financial Times this morning, Greece has just nine days to implement or make a start on reforms from sacking dud tax collectors to passing legislation, opening up professions and privatisation.
Just what happens if Greece hasn’t done what is being demanded of it by Friday week, remains to be seen. It’s another of an increasing number of absurd deadlines imposed by an increasingly distrustful IMF, EU and others. And there are more stumbling blocks: the package has to be ratified by all 17 members of the eurozone. Watch for tough votes in Finland and Holland, which are very sceptical of bailing out Greece. The IMF also has to agree, and is demanding the EU expedite the establishment of a single bailout fund, a move opposed by the Germans.
Most of the money in the package will be used to finance the bond swap with the banks and other holders of Greek debt. About €30 billion will go to “sweeteners” to get the private-sector bond holders to sign up to the swap; €23 billion will go to recapitalise Greek banks. That will help ensure Greece’s banking system remains stable, which is the only significant benefit from the deal so far as Greeks are concerned. They have been taking billions of euros out of the banks for more than a year, shipping it offshore or keeping it in cash somewhere.
A further €35 billion will allow Greece to finance the buying back of the bonds, and €5.7 billion will go to paying off the interest accrued on the bonds being traded in. While the latter reduces the future debt burden, it does mean the banks will get income on their bonds and won’t have to write them down any more.
Apart from helping the country’s banks, there’s next to nothing from the package that will go directly to help the Greek economy. In other words, the banks and other bond holders get bailed out, ordinary Greeks will get unemployment, lower wages, lower pensions and years of near depression and penury for those who get left behind.
Moreover, the Greek government has had to accept an “enhanced and permanent” presence of EU bureaucrats to monitor its affairs to ensure compliance with austerity measures. Greece is now effectively a country under external administration. Funds will be placed in an escrow account, which Greece will ensure always holds three months’ worth of debt payments. The escrow account will be replaced once the Greek government has passed into law a provision to give priority to debt service payments above all other public expenditure, including its inclusion in the Greek constitution as soon as possible.
So if Greece has a national disaster, say a huge earthquake, it has to give debt repayments precedence over any financing of the recovery from such a disaster. Let’s see that one fly in Athens.
This deal keeps Greece afloat until March 20 when a €14.5 billion bond falls due for repayment. That will be avoided, meaning the prospects for a nasty default has been avoided as well. After that, it’s still anybody’s guess. Greek elections are planned for April (the Germans are saying they should not be held — is it any wonder Germany is in such foul odour among Greeks?). The bailout’s unpopularity can only deepen in Greece. One party leader has referred to the deal as a “terrorist assault” that is binding only on those who signed it, as they lack democratic legitimacy.
The landscape after the poll could be chaotic and very anti-German. There are still many Greeks who remember the German occupation 70 years ago and wonder what’s changed other than the accountants replacing soldiers.
The only benefit for the rest of us is that a Greek default has been staved off again. The longer it is delayed, the better for the European financial system. But it still seems like the delay is merely of the inevitable.