This latest Greek debt deal will unravel very quickly, despite the pangloss that European leaders will undoubtedly attempt to wrap around it. As the FT reports today, finance ministers attending this latest all-nighter in Brussels were informed last week that the implosion of the Greek economy ensured that the country’s debt dynamics were far worse than anticipated and that yet another expensive bailout would probably be required after the money from this second EUR 130bln had been disbursed. This new, more realistic appraisal of Greece’s frightening debt dynamics explains the incredible reluctance by Germany, the Netherlands and Finland to accept this latest deal. Indeed, before this agreement is official, it needs to be passed by each of these increasingly sceptical national parliaments, something which is in no way guaranteed.
The leaked confidential report for finance ministers also makes it clear that Greece will probably be unable to deliver the necessary structural reforms and policy adjustments due to institutional resistance. In addition, recapitalising the Greek banking system will cost nearer EUR 50bln (up from a previous estimate of EUR 30bln), while the much-vaunted sale of state assets will deliver a lot less money and take a lot longer. More worrying, there are numerous obstacles mounting up that will render a successful outcome to this whole process extremely difficult to achieve, apart from the very sticky question of whether national parliaments will actually sign the bailout deal:
- How will an escrow account for Greece actually work in practice? Can Europe agree on how it will work, and moreover, can it do so very quickly?
- Just who does the IIF (the apparent voice for private holders of Greek debt), really represent? Will there be sufficient take-up of the voluntary debt swap, or will some bond-holders scupper it in the knowledge that if take-up is not enough then Greece will impose collective-action clauses which will trigger the CDS many have against their bonds?
- How will private bondholders respond to the fact that the ECB is not taking a haircut on its Greek exposure? If the ECB will not take a haircut on Greece, presumably it will not take a haircut on any other sovereign either, should it be necessary. In effect, private investors in European sovereigns appear to have become subordinated to the ECB and the other national central banks.
- How do other eurozone sovereigns feel about Finland’s insistence that it gets collateral for its bailout contribution?
- How will Ireland and Portugal respond to the announcement that Greece’s official creditors have agreed to lower the coupon rate on their loan?
Frankly, it would be remarkable if Europe got its collective act together on these points in time for the March 20th Greek bond repayment. There is still every prospect that this deal will rapidly become irrelevant and overcome by events. At the death, Europe will probably give Greece a bridging loan to meet the bond repayment, to buy more time and get the country through until the next election.
Unfortunately, time is money and, for Greece, it gets more and more expensive by the day.