Read more: how Greece became Europe's fault line by George Magnus
The third bailout deal for Greece may yet turn out to be like the punishment meted out to Sisyphus, or it may yet collapse and end up with Greece leaving the eurozone. It has come as a shock to many that some sort of bailout phoenix has risen from what seemed like July’s ashes of distrust and despair. A three-year deal, worth up to €86bn, still has details to be ironed out and has to be approved by European finance ministers, and the Greek parliament. It then has to be endorsed by eurozone governments or ratified by some parliaments, including the German Bundestag.
But as things stand, a deal could be in place by 20th August when Greece has to make a payment of just over €3bn to the European Central Bank. This could be in the form of a short-term bridging loan, if necessary, or it could be the first tranche of the bailout, but either way, the Greek crisis can revert to being a big problem—for the time being. Stopping it becoming a full-blown crisis again will depend on solving the predicament of the Greek banks, some form of debt restructuring and the tangled web of Greek politics.
It had seemed as though so-called “prior actions” were going to cause further acrimony between Greece and some of its creditors. These are legislated reforms and initiatives that have to be approved by Greece before bailout funds can be disbursed. Last month, Greece passed some of these prior actions, including a simplification of VAT rates and a widening of the tax base, reductions in some pension payments, assurances about the independence of the national statistics agency, and measures to overhaul the civil justice system. But there were other prior actions that were dropped or hadn’t been formulated.
Until last weekend, many of these, including tax breaks for farmers, receiving subsidised fuel, had proved contentious. A lot of citizens living in rural areas but working in urban areas had re-classified as farmers to claim benefit. Shipping companies and lawmakers had also benefitted disproportionately from advantageous tax treatment. But in the last few days, the potential for a split between Greece that wanted to get on with the deal, and Germany which had expressed a desire for “more haste, less speed,” seems to have melted away.
A lot of progress appears to have been made in resolving most of the 35 prior actions demanded by Greece’s creditors, even if some details are yet to be finalised. These include changes in the tax regime for shipping companies, lower prices for generic drugs, a review of the social welfare system, the end of special tax breaks for the islands from 2016, deregulation of the energy market, product market reforms (including Sunday trading) as urged by the OECD for its members, labour market reforms and importantly relatively urgent measures to put the banking system back on to an even keel.
A cursory look over many of these measures appears rightly to be less about feared austerity than about the simple matter of good or better governance. The acid test though is that the equally feared primary balance targets—the fiscal balance without interest payments—have been eased significantly. Because of the slump in Greek GDP this year, Greece can still run a deficit of 0.25 per cent of GDP. It may actually be bigger because the fall in GDP could be nearly twice as much as is being forecast. But in 2016 and 2017, instead of primary surpluses of 4.5 per cent of GDP, Greece will have to realise only 0.5 per cent and 1.75 per cent of GDP, respectively. Alexis Tsipras will claim this as a big concession. These much less demanding fiscal targets should be possible to reach if the Greek economy recovers a bit—which it should a) as the bailout is finalised and b) as the banks are re-opened and re-capitalised.
The biggest “still to be done” item concerns the banks, which are not insolvent, but have high levels of non-performing loans, estimated at around 30-35 per cent of assets, and which badly need new capital to underpin their viability. It is thought that they need about €25bn of new capital, but it is not certain yet how much they will get when the first tranche of the loan is disbursed. Strictly speaking, the banks should be subjected to an asset quality review and stress test, and then re-capitalised. But because of political processes and debt schedules, it looks as though this sequence will be reversed, re-capitalisation money first, AQR and stress test later. This opens up the risk of fudge when the banks are allocated new capital.
Debt restructuring in some form is a sine qua non for debt sustainability in Greece, that is where the debt to GDP rate peaks and gradually starts to fall. This won't be part of the imminent agreement, but it has been mooted as possible as progress on the bailout is reviewed periodically.
The €50bn privatisation fund, while agreed in principle, and earmarked as a long-term funding source of bank recapitalisation, remains shrouded in uncertainty, and political controversy.
And finally, Greece’s commitment to the bailout’s Memorandum of Understanding will only be as solid as a) the degree to which Alexis Tsipras embraces ownership of the programme while outwardly demonising it and b) the position of the Greek government, itself. Remember, Alexis Tsipras had to rely on the votes of opposition parties to get this far and he may have to cut loose formally from roughly 35-38 Syriza members of parliament that are part of the Left Platform. This may well result in new elections in late summer or early autumn.
We can’t say the Greek crisis is over, but if crisis is defined as a period of intense difficulty or danger, then at least the intensity has dissipated a bit. A failure to address the banking sector properly, or concede debt restructuring, or domestic political instability, or another economic shock could wreck the current calm and yet cause Greece’s europhile side to become europhobic. But for now, things are going the other way.
The third bailout deal for Greece may yet turn out to be like the punishment meted out to Sisyphus, or it may yet collapse and end up with Greece leaving the eurozone. It has come as a shock to many that some sort of bailout phoenix has risen from what seemed like July’s ashes of distrust and despair. A three-year deal, worth up to €86bn, still has details to be ironed out and has to be approved by European finance ministers, and the Greek parliament. It then has to be endorsed by eurozone governments or ratified by some parliaments, including the German Bundestag.
But as things stand, a deal could be in place by 20th August when Greece has to make a payment of just over €3bn to the European Central Bank. This could be in the form of a short-term bridging loan, if necessary, or it could be the first tranche of the bailout, but either way, the Greek crisis can revert to being a big problem—for the time being. Stopping it becoming a full-blown crisis again will depend on solving the predicament of the Greek banks, some form of debt restructuring and the tangled web of Greek politics.
It had seemed as though so-called “prior actions” were going to cause further acrimony between Greece and some of its creditors. These are legislated reforms and initiatives that have to be approved by Greece before bailout funds can be disbursed. Last month, Greece passed some of these prior actions, including a simplification of VAT rates and a widening of the tax base, reductions in some pension payments, assurances about the independence of the national statistics agency, and measures to overhaul the civil justice system. But there were other prior actions that were dropped or hadn’t been formulated.
Until last weekend, many of these, including tax breaks for farmers, receiving subsidised fuel, had proved contentious. A lot of citizens living in rural areas but working in urban areas had re-classified as farmers to claim benefit. Shipping companies and lawmakers had also benefitted disproportionately from advantageous tax treatment. But in the last few days, the potential for a split between Greece that wanted to get on with the deal, and Germany which had expressed a desire for “more haste, less speed,” seems to have melted away.
A lot of progress appears to have been made in resolving most of the 35 prior actions demanded by Greece’s creditors, even if some details are yet to be finalised. These include changes in the tax regime for shipping companies, lower prices for generic drugs, a review of the social welfare system, the end of special tax breaks for the islands from 2016, deregulation of the energy market, product market reforms (including Sunday trading) as urged by the OECD for its members, labour market reforms and importantly relatively urgent measures to put the banking system back on to an even keel.
A cursory look over many of these measures appears rightly to be less about feared austerity than about the simple matter of good or better governance. The acid test though is that the equally feared primary balance targets—the fiscal balance without interest payments—have been eased significantly. Because of the slump in Greek GDP this year, Greece can still run a deficit of 0.25 per cent of GDP. It may actually be bigger because the fall in GDP could be nearly twice as much as is being forecast. But in 2016 and 2017, instead of primary surpluses of 4.5 per cent of GDP, Greece will have to realise only 0.5 per cent and 1.75 per cent of GDP, respectively. Alexis Tsipras will claim this as a big concession. These much less demanding fiscal targets should be possible to reach if the Greek economy recovers a bit—which it should a) as the bailout is finalised and b) as the banks are re-opened and re-capitalised.
The biggest “still to be done” item concerns the banks, which are not insolvent, but have high levels of non-performing loans, estimated at around 30-35 per cent of assets, and which badly need new capital to underpin their viability. It is thought that they need about €25bn of new capital, but it is not certain yet how much they will get when the first tranche of the loan is disbursed. Strictly speaking, the banks should be subjected to an asset quality review and stress test, and then re-capitalised. But because of political processes and debt schedules, it looks as though this sequence will be reversed, re-capitalisation money first, AQR and stress test later. This opens up the risk of fudge when the banks are allocated new capital.
Debt restructuring in some form is a sine qua non for debt sustainability in Greece, that is where the debt to GDP rate peaks and gradually starts to fall. This won't be part of the imminent agreement, but it has been mooted as possible as progress on the bailout is reviewed periodically.
The €50bn privatisation fund, while agreed in principle, and earmarked as a long-term funding source of bank recapitalisation, remains shrouded in uncertainty, and political controversy.
And finally, Greece’s commitment to the bailout’s Memorandum of Understanding will only be as solid as a) the degree to which Alexis Tsipras embraces ownership of the programme while outwardly demonising it and b) the position of the Greek government, itself. Remember, Alexis Tsipras had to rely on the votes of opposition parties to get this far and he may have to cut loose formally from roughly 35-38 Syriza members of parliament that are part of the Left Platform. This may well result in new elections in late summer or early autumn.
We can’t say the Greek crisis is over, but if crisis is defined as a period of intense difficulty or danger, then at least the intensity has dissipated a bit. A failure to address the banking sector properly, or concede debt restructuring, or domestic political instability, or another economic shock could wreck the current calm and yet cause Greece’s europhile side to become europhobic. But for now, things are going the other way.
