After weeks of agonizing negotiations among Greek government officials, private lenders and other international creditors, the governing coalition in Athens has finally given approval to the latest round of austerity measures in order to receive a second bail-out – in time to meet its deadline for preventing a messy and potentially contagious default on its national debt in March.

 Even if the deal goes through, however, similar episodes are liable to recur, according to Mohamed El-Erian, who heads Pimco, one of the world’s largest bond investors in sovereign debt bonds. He says that a key problem in Greece is “lack of ownership” among the players in the bailout talks. “As a result, principals – be they government leaders, the ECB and IMF, or those negotiating on behalf of private creditors – find it difficult to sell the agreement to constituents.”

Yet none of the parties wants to explain the problem and risk being accused of triggering what could be a catastrophic Greek default.

This problem of "ownership" and authority makes it harder, for example, for the Greek government and EU pressure, to quell the violent protests such as the one in Athens today. Led by public sector trade unions, this political revolt enjoys wider popular support. Many Greeks feel angrily that their economy has steadily plunged deeper into recession with each new round of austerity imposed by the IMF and the EU.

As El-Erian explains, groups in successive Greek governments have refused to really “bear responsibility” for many of the austerity conditions that need to be implemented in order to make Greece more economically competitive. Bond holders are already taking a large “haircut” in writing off much of the value of the of the Greek debt they hold, but the overall “weak ‘ownership’ undermines the many corrections that are needed over the course of an adjustment program ... only pure genius or enormous luck could produce a perfectly designed Greek program. It is almost inevitable, given the fluidity of the situation in Greece and the global economy, that whatever is agreed will need tweaking in the implementation stage,” according to El-Erian.


By European Affairs