Tuesday 27 November 2012

Eurogroup achieves compromise on Greece; definition of “debt sustainability” highly unlikely

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. 


  1. Phillip I put the cost of this latest "deal" at 10% of GDP per year until 2022. Also it does nothing to address the trade deficit which on its own is enough to shrink the economy by 5% a year. In short I do not see where the growth will come from. The only growth in Greece has come from massive government borrowing. The Greek Central Bank can no longer print currency so in short any predictions of growth are a complete fantasy when tied to the trade deficit.

    And taking in a step further, do you believe the Euro is a defacto Gold standard (or very close to) and if so do you believe that deflation will have to be used to measure economic growth in the Euro Zone in the future rather than GDP?

    1. Richard, it depends on what you mean by cost. Do you mean resulting interest on the debt after the haircut? If so, it's much higher to 2022.

      Growth in Greece can come from privatisation and attraction of foreign (and domestic investment), and deregulation. There are any number of examples which point to this. You can view my presentation with some ideas on this here:


      It is a mistake to think that "massive government borrowing will result in growth. If you mean GDP growth, this growth is the sum of value produced in Greece, and the balance between imports and exports. If public sector borrowing is to cover operating costs (e.g. wages), then the GDP impact is limited to consumer spending. If the borrowing is to refinance debt, then there is no GDP impact at all.