After weeks of wrangling over Greece’s debt
sustainability, the Eurogroup
approved a compromise agreement last night under which:
·
The notion of debt
sustainability was re-defined between the IMF and the Eurozone, enabling both
parties to save face and the IMF to keep lending (which it is legally prevented
from doing if its own analysis indicates that a debt is unsustainable).
·
The long-awaited tranches
agreed in the first and second bail-outs will be disbursed as soon as Eurozone
member states approve the deal. The total amount is EUR 43.7 billion, of which
EUR 23.8 bln is EFSF bonds for bank recapitalisation and EUR 10.6 bln for
budget financing (most of which involves public debt refinancing).
·
Minor tinkering in loan terms,
including a 10 year maturity extension, a 100 basis point interest rate
reduction on the Eurozone component of the loans, and a 10 bp EFSF interest
rate reduction. Member States are “committed” to returning ECB profits to
Greece from the ECB’s secondary market operations.
·
Greece is also given an
additional 2 years to meet fiscal targets, which was a key campaign demand of
Antonis Samaras, the Greek Prime Minister.
Unfortunately, none of these “deal”
components are sufficient to solve the actual problem:
a.
Under the plan, Greece’s debt
will continue to rise – to at least 190% of GDP – before hypothetically falling
to 175% of GDP in 2016 and 124% of GDP in 2020.
b.
Given this fact, it is
impossible to see how foreign (or domestic) investment and privatisation will
be attracted to Greece, enabling a real economic recovery to take place. As
such, it is highly questionable to believe that growth targets can be met.
c.
A 100 bps interest rate
reduction on the Greek Loan Facility, while welcome, is insufficient to assure a
substantial reduction of debt. The GLF amounts to EUR 73 billion disbursed from
May 2010 – December 2011, and while I do not have a precise current interest
rate amount (these are bilateral loans), if we assume a reduction from 4% to
3%, the total saving is on the order of EUR 803 mln—probably less. This saving
is less than 8% of Greece’s budgeted annual interest costs (EUR 10 billion),
and about 5% of what I calculate actual interest costs are (EUR 14 billion).
d.
Extending the debt maturity,
while temporarily removing future repayment risks, continues to accrue interest,
and therefore debt. Allowing Greece a further 2 years to meet fiscal targets
continues to accrue interest and therefore debt.
e.
There was no decision on using
EFSF funds to implement an open-market buyback. The comment in the communiqué
that “Greece is considering certain debt
reduction measures in the near future, which may involve public debt tender
purchases of the various categories of sovereign obligations” is
disingenuous, to say the least, given that Greece does not have the financial
resources to do so, and in any case is prevented by the bail-out agreements
from doing so: all extra revenue is earmarked for Troika debt service.
Viewed from a political perspective, I can
well imagine that the rationale for this decision was something to the extent
that “We’ve done what we can – Greece
must do the rest.” There is much truth in this statement.
Yet to the reality-based perspective, all
this is too little, too late to make much of a real difference. What appears to
be a deliberate obfustication of the facts only casts suspicions that European
policymakers are out of touch with financial reality. This carries a grave cost
in terms of market confidence, and a grave risk in terms of contagion effects
on other Eurozone countries.
I reflect briefly on the events of the past
few years. Mr. Antonis Samaras served as leader of the New Democracy opposition
party from early 2010 to June 2012. Apart from a brief stint where ND
participated in the Papademos interim government (from November 2011 – April
2012), he has been virulently opposed the austerity measures which he has just
passed in order to assure this latest instalment of the “never-ending Greek
bailout”.
Today he returns from Brussels, heralding a
“victory” in the negotiations, and trying to make the most politically from
this. Yet in a recent
poll, SYRIZA leads polling by 22.3% (voter intentions), followed by ND with
20.1%, Chryssi Avgi with 10.3%, and PASOK with 7.5%. Other polls put SYRIZA and
Chryssi Avgi 2 points higher.
To paraphrase the political perspective
mentioned earlier: the ball is indeed in Greece’s court. But this is precisely
where it has been since the October 2009 elections, and beforehand.
Absent a real restructuring of the public
sector and a real growth strategy, the latest Greek bail-out will fail to make
any meaningful impact on either economic growth or employment. The root causes
of this are unchanged:
1.
A dysfunctional political oligarchy
which is literally driving the country to ruin for political and financial gain;
2.
Endemic corruption, a
tragicomic justice system and an underperforming education system which
exacerbate the other trends;
3.
A lack of international
competitiveness or competitive advantage in every economic field;
4.
A global financial and
manufacturing economy which makes traditional policy remedies (import taxes,
capital controls, devaluation) impossible;
5.
Repeated attempts to solve a
public debt crisis by adding more debt.
If Greece continues to look for European
assistance to solve its debt crisis and its underlying economic
uncompetitiveness, it will fail. Indeed, in the dual dependency culture it has
developed, it already resembles many highly indebted African countries that
have suffered so much throughout the 1970s and 1980s.
Regrettably, I see no signs of any real
policy initiatives necessary on the scale of addressing these five root causes.
I expect continuing political fragmentation, and I do not believe the current
government will last beyond May or June or 2013.
As such, I see few signs of a sustainable
solution ahead.
© Philip Ammerman, 2012
Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network. The opinions
expressed in this post are his own.