EU Clears Third Bailout to Help Greece Pay Debt and Promote Development; Toxic Debate before Greece’s Parliament Approved Reforms Brussels Demanded (8/17)     Print

spellmanBy James D. Spellman, Strategic Communications LLC

The European Union Friday (August 14) cleared a third bailout, a three-year program that provides Greece with €85 billion ($94.3 billion) to pay debt, recapitalizes banks initially with €10 billion ($11.1 billion) and launches a €35-billion ($38.8 billion) economic development package provided that a quarterly review affirms that Athens is achieving increasingly larger budget surpluses over the next three years.

While the deal takes pressure off Athens to meet upcoming debt-repayment deadlines, the government spending targets will be extremely difficult to achieve and capital controls will remain until banks can address bad loans and staunch potentially massive transfers of funds outside Greece. Meanwhile, debt-relief remains uncertain since negotiations aren’t slated to start until autumn following an assessment of Greece’s success in implementing reforms – even as the International Monetary Fund’s insistence intensifies to reduce the “unsustainable” debt load.

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Source: Wall Street Journal, August 12, 2015.

Greece’s difficulties are further compounded by its economy, likely to decline 2.3 percent this year and fall another 1.3 percent next year, according to officials’ estimates. Most of the past seven years have been spent in recession. Surveys show revenue at businesses down sharply, partly as a consequence of the capital controls implemented on June 29, perhaps presaging even deeper declines.[1]

Before Brussels could sign off, Athens had to approve an extensive program of fiscal and market reforms, which include overhauling the welfare system, delaying retirement (raise retirement age to 67 by 2022), modernizing the gas market, selling off state property, and raising taxes. Further, “the 29 pages of conditions concede ultimate authority over much of Greek policymaking to the Eurozone and establish a system of quarterly reviews of the reforms by the troika of institutions – the European commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – representing the creditors.”[2]

After a night-long marathon session, a debate some described as “toxic,” Greece’s Parliament narrowly approved the reforms on August 14. But the vote came with political costs for the Prime Minister, Alexis Tsipras, and his ruling party, Syriza. Almost a third of the Syriza representatives abstained or voted against the agreement.[3] Pressure mounts for a vote of confidence on Tsipras’s leadership as some prominent politicians call for a new anti-bailout movement, Greek newspapers report. The political turmoil adds to doubts that Greece can deliver on its commitments.

For the European Union, the deal emphatically stresses that Greece’s continued membership within the Eurozone is essential, despite the financial costs and political fissures. European Commission President Jean-Claude Juncker said when Eurozone finance ministers approved the package on August 14: “The message of today's Eurogroup is loud and clear: On this basis, Greece is, and will irreversibly remain, a member of the Euro area.”

Yet, the domestic political difficulties that Germany’s Chancellor, Angela Merkel, faces in the Bundestag show the strains within key EU member-countries towards rescuing Greece. She faces her biggest political challenge since taking office in 2005, political observers say, to secure the legislature’s approval on August 19 of assistance to Greece. The lack of the IMF’s commitment yet in sharing the bailout costs has strengthened parliamentarians’ objections. “I am afraid that we are once again buying ourselves a little time with a very, very large amount of money,” said one MP. “[D]issent has grown with each ballot and 60 lawmakers in her 311-member caucus voted against even holding talks on further aid to Greece last month,” Bloomberg reported.[4]

What this demonstrates is that “member states are the ultimate paymasters and therefore ultimate decision makers,” writes Radek Sikorski, Formerly Poland’s minister of defence and of foreign affairs.[5]

As difficult as the most recent package was to negotiate, a debt-relief package will likely be even harder. The IMF’s strategy is to without its financial contributions to the bailout costs until there is debt relief. “I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own,” said Christine Lagarde, the IMF managing director. Merkel said there was “room for maneuver” but emphatically ruled out a “haircut” on Greek cut, an across-the-board percentage cut of the amount Greece owes to credits. Yet, “[T]here is still leeway on the extension of maturities, on interest rates,” she said.

A memo prepared by staff at the EU Commission and the European Central Bank reveal the enormity of that debt burden and its long-term consequences for Greece’s economy. “Even if Greece implements the full bailout program and manages to raise €13.9 billion ($15.45 billion) from privatizing state assets, its debt is expected to remain at 159.7 percent of gross domestic product in 2022, the document says.” [6]  One part of the solution, the paper said, could include the Eurogroup “reinstat[ing] the transfers equivalent to the … profits [on loans made to Greece] which would bring the debt ratio down by 5 pp. of  GDP in 2030.”

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Source: Document prepared by institutions involved in Greece bailout negotiations, including the European Commission and the European Central Bank. August 12, 2015.

Academic research into the ability of countries to exercise cost-cutting and restrain spending shows it’s highly unlikely.   Two researchers – University of California-Berkeley economist Barry Eichengreen and a professor at the Graduate Institute in Geneva, Ugo Panizza -- looked at 54 economies between 1974 and 2013 to see whether any had run large surpluses, and if so, for how long. “They were able to find just 36 instances in which a country managed to hit a 3 percent surplus for at least five years. There were just 12 in which a country managed to do it for a decade.”[7]

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Source: Jordan Weissmann, “Greece’s New Bailout Deal Sounds Like It’s Destined to Fail.” Slate, August 11, 2015.

http://www.slate.com/blogs/moneybox/2015/08/11/greece_has_a_bailout_deal_it_ll_probably_fail.html.   The paper is available at: http://www.nber.org/papers/w20316.pdf .

London School of Economics Professor Paul De Grauwe thinks the IMF, the ECB, and others have overestimated Greece’s debt burden. He argues that even though the debt is roughly 180 percent of GDP, the interest burden after a restructuring in 2012 that forced debtholders to take deep haircuts, is “just 2 percent of GDP.” [8] “[T]he headline debt burden of 180% of GDP in 2015 vastly overstates the effective debt burden,” De Grauwe writes. “Various estimates based on the net present value of future interest payments and debt repayments suggest that this effective debt burden of the Greek government is less than half of the headline debt burden of 180%.”

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Source: Peter De Grauwe, “Greece is solvent but illiquid: Policy implications.” Vox, July 3, 2015. http://www.voxeu.org/article/greece-solvent-illiquid-policy-implications .

Greece’s banks will operate under capital controls for some time, with daily cash withdrawals limited to €60 ($67) and payments and transfers outside Greece prohibited. The capitalization program Eurozone finance ministers approved would provide €10 billion in funds immediately and another €15 billion later if warranted through the European Stability Mechanism, the so-called €500 billion ($550 billion) “firewall” fund banks and EU member-countries can access under certain criteria to contain and ameliorate financial traumas. To be eligible, banks must have successfully completed the EU’s stress tests and asset-quality reviews, which the Greek banks have done.[9]

Bank depositors will not have to share the cost of fixing the banks, though, the “bail-in of depositors.” Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem said depositors will be shielded from any losses, with coverage for small and medium-sized enterprises, for example, that have more than €100,000 on deposit and aren’t covered by government deposit insurance. Doing so, Dijsselbloem said, prevents “a blow to the Greek economy.”[10] But senior bondholders would be subject to “bail in” conditions, a liability that triggered a sharp sell-off of Greek bank bonds on August 17.

Piraeus Bank's 2017 bond fell 26 percent in price while its yield climbed to 88.21 percent from 54.78 percent. Alpha Bank's 2017 bond also dropped, its price down 16.3 per cent to 59 cents as its yield rose to 38.5 percent from 25.4 percent.   The Athens stock market, though, rose slightly, up 1.04 percent at 680.94 at market close, disguising the fall in banking shares, which as a group dropped 8.67 percent.

Timetable:  How did Greece get here?

Source: http://www.bbc.com/news/business-33858660; August 14 entry added by author.

 


[1] Paul Tugwell and Marcus Bensasson, “Capital Controls Gum Up Greek Businesses Struggling to Survive.” Bloomberg, August 14, 2015.
http://www.bloomberg.com/news/articles/2015-08-14/capital-controls-gum-up-greek-businesses-struggling-to-survive .
“Revenue at small firms, which account for most of Greek business, fell by an average 48 percent in the first two weeks of the capital controls, according to a July survey of 1,005 companies by the Small Enterprises Institute of the Hellenic Confederation of Professionals, Craftsmen and Merchants, known by its Greek acronym Gsevee.”

[2] Jon Henley, “Greek PM seeks bailout ratification as doubts remain over German support.” The Guardian, August 12, 2015. 
http://www.theguardian.com/business/2015/aug/12/greek-pm-seeks-bailout-ratification-as-doubts-remain-over-german-support .
The document specifically says: “The [Greek] government commits to consult and agree with the European commission, the European Central Bank and the International Monetary Fund on all actions relevant for the achievement of the objectives of the memorandum of understanding before these are finalised and legally adopted.”

[3] George Georgiopoulos and David Stamp, “Tsipras likely to call confidence vote after party revolt.”
Ekatherimi, August 17, 2015.
http://www.ekathimerini.com/200618/article/ekathimerini/news/tsipras-likely-to-call-confidence-vote-after-party-revolt .

[4] Arne Delfs, “Merkel Says She’s Confident IMF Will Join Greek Bailout.” Bloomberg, August 16, 2015. 
http://www.bloomberg.com/news/articles/2015-08-16/merkel-flags-debt-relief-for-greece-to-secure-imf-role .

[5] Radek Sikorski, “Member states must back their jointly chosen EU leaders.” Financial Times, August 16, 2015. www.ft.com.

[6] Gabriele Steinhauser and Marcus Walker, “European Document Expresses Deep Concerns About Greek Government Debt.” Wall Street Journal, August 13, 2015.
http://www.wsj.com/articles/european-document-expresses-deep-concerns-about-greek-government-debt-1439465920 .

[7] Jordan Weissmann, “Greece’s New Bailout Deal Sounds Like It’s Destined to Fail.” Slate, August 11, 2015.
http://www.slate.com/blogs/moneybox/2015/08/11/greece_has_a_bailout_deal_it_ll_probably_fail.html.   The paper is available at: http://www.nber.org/papers/w20316.pdf .

[8] Peter De Grauwe, “Greece is solvent but illiquid: Policy implications.” Vox, July 3, 2105.
http://www.voxeu.org/article/greece-solvent-illiquid-policy-implications .

[9] Rebecca Christie and Corina Ruhe, “EU Aims to Lure Greek Deposits Back to Banks With Bail-in Shield.” Bloomberg, August 14, 2015.
http://www.bloomberg.com/news/articles/2015-08-14/eu-aims-to-lure-greek-deposits-back-to-banks-with-bail-in-shield ,

[10] “[T]here will be later this year, this autumn, an asset quality review and stress test, and on the basis of that, recapitalisation will take place. In that process the bail-in instrument will apply for senior bondholders, whereas the bail-in of depositors is explicitly excluded.” For full remarks, see: http://www.consilium.europa.eu/en/press/press-releases/2015/08/14-jd-remarks/ .