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Greece: A bad deal with the country on the brink

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By Dimitris Bounias

Four international experts who have been following the eurozone financial crisis, comment on the latest deal between Greece and its creditors, pointing out the extremely steep primary surplus targets as well as debt relief, both issues contested among creditors, mostly between Germany and the IMF. It is pointed out that a successful completion of the bailout review could have a positive side effect since it will be the final criterion upon which the ECB can decide on whether to include greek bonds in the quantitative easing program. Even so, more pain for Greece is expected as we move forward, in an issue that is as much political as it is one of public finances.

The comments were lightly edited for size and clarity where given verbally.

 

Federico Fubini: Everybody knows that the unsustainable surplus target are being pushed for Germanys internal politics

There are currently two different outstanding issues. The first is debt relief and the other big issue is the primary surplus target. The debt relief is more politically substantial. Given the extension Greece already got in 2012, the debt servicing currently is not much higher than Frances  - and definitely lower than that of other countries. However, first of all, politically it is very important that the government has something to show for the sacrifices they agreed to. On the financial aspect too, it is extremely important because before the ECB will want a debt sustainability report before it considers the country for the Quantitative Easing. If you get that kind of agreement and once greek bonds are included in the QE, many things will change. You will see a fast drop in interest rates so probably investment will rise and a lot of money will pour into the country.

The far more important issue, however, is the primary surplus. Greece is losing 29,6% GDP from when it peaked, and it has achieved an unprecedented fiscal consolidation of 11% of GDP (according to IMF data). The question now is: How much more fiscal effort can you demand from a country that suffered a huge reduction in GDP of that kind? Probably not much. So is that target credible? This was Ms. Lagardes point. Is it credible that not only you get to 3,5% surplus but sustain that indefinitely? There are very few such instances in history and I dont see how a country that had a catastrophe like that can handle such a fiscal tightening forever. Everybody knows that this is driven by the German political cycle rather than by reason, but this is the other discussion that we need to have now and I think it will follow in the next period of time, depending on what the situation in Germany is. Merkel is weak and she needs Schaeuble, Schaeuble has the CDUs backing, and the CDU doesnt want to be seen as giving Greece more money. This is in effect the political issue in a country directly influencing another member state.

The IMF and Germany have to come to a compromise, otherwise the german government will be embarrassed. That doesnt mean Greece doesnt need reforms. But you cant hang yourself to a target like this. this is more important than the debt.

*Federico Fubini (@federicofubini) is a financial journalist and writer. He is the vice-director of Corriere della Sera.

Megan Greene: Greek uncertainty doesnt affect the international markets

Sitting in the US, the most remarkable thing about investors’ responses to the current stand-off in Greece is that there haven’t really been any. The uncertainty over what will happen in Greece over the next two months may be impacting the Greek markets, but it is having virtually no spill over into other markets.

The Greek government and policymakers in Brussels have gone out of their way to spin the provisional deal as a huge success. Anyone looking into the details will see through the rhetoric though and recognize that huge challenges remain. Germany has finally publicly agreed to have a serious conversation about debt relief. The IMF has agreed that contingency measures can be across the board to start with before targeted measures kick in, and those targeted measures can be legislated later. The stumbling block is that the IMF wants all the numbers to add up. The IMF has always wanted the numbers to add up, but in the past has held its nose and signed on the dotted line of the MoU anyhow. This time that will not work. Either Germany will have to agree to debt relief to put Greece on a sustainable fiscal dynamic, or the IMF will not lend money to the program. The latter would be a problem for the leading CDU party, which needs political cover from the IMF to be releasing more money to Greece—particularly just before an election year.

As is always the case in these negotiations, resolution will not come until it absolutely must. The Greek government may not have the cash to make payroll for civil servants in June, in which case it must conclude the first review at the May 24th Eurogroup. Otherwise, the hard deadline is in late July when Greece has to rollover debt to the ECB. Either way, the outcome is likely to be the same. Germany will agree to debt relief, the IMF will rejoin the institutions and the Greek government will have to cave to even more demands than if it had just played nice with Greece’s creditors earlier on in the process. Resolution in the first bailout review will still leave a lot unresolved. The debt relief offered will do nothing to reduce the current public debt overhang crowding out the Greek private sector, implementation problems in Greece abound and  the government has a sliver of a majority and is behind in public opinion polls. Greece might recede from the headlines for a bit, but it will be back.

*Megan Greene (@economistmeg) is chief economist at Manulife and John Hancock Asset Management.

 Mujtaba Rahman

The creditors dont agree on the baseline economic context in Greece, they havent been able for months, which is why there are wildly different forecasts voiced. The argument has not gone away, its just wrapped up in the contingency measures. The IMF is far more skeptical about the sustainability of the deal and that is going to permeate the discussions going forward.

The single most important factor for sustainability is the target for the primary surplus - and it is heavily intertwined with the debt relief. The IMF is arguing that the 3,5% of GDP primary surplus target is unattainable, and is suggesting 1,5% instead. And taking that for granted, the Fund is arguing further that debt servicing is not sustainable and thus the european creditors will have to commit to more generous debt relief. The issue is heavily political between the IMF and Germany, because Germany needs the IMF on board the program. At the same time the european creditors red line is a nominal haircut of the debt.The second question is, once we have committed to a framework, how do we make the numbers work? I think we are going to end up in a situation where well have to look at what happens after 2018. The carrot for Greece to press on with reforms is conditional debt relief. But at the same time the markets are more focused on, upon successful completion of the review, Greece is included in the ECBs quantitative easing. And you can use QE as leverage too.

I am optimistic that an agreement will be struck also because of other factors, like the refugee issue and the question of Brexit. But I am pessimistic about how the deal would work because the country is committed to a big surplus with no real debt relief. So I cannot be hopeful long term for either Greece or the Eurozone, this is just keeping the show on and kicking the can down the road.

 

*Mujtaba Rahman is the head of Eurasia Groups Europe Practice.

 

Marcus Walker: I expect a deal when Greece is close to the brink

 

This deal is less than meets the eye and has been accompanied with much marketing and wishful thinking in Athens and Brussels. Schaeuble and the IMF have made important concessions but it doesnt fix the problem. The reason for the impasse is Germany saying they wont release money until the IMF is prepared to rejoin the bailout. That remains their position despite hopes in Brussels that Germany will release money for Greece even if the IMF merely says there is some progress. the Fund wants a combination of greek measures and european debt relief that "add up". So far they have neither the measures they want nor the debt relief. Thus the two sticking points remain. There is progress by means of Schaeuble agreeing to talk about debt. That is something. Meanwhile, the IMF agreed that the contingency measures can begin with Tsakalotoss horizontal chopper and be followed by proper fiscal measures. the Fund no longer wants the permanent measures to be legislated now. However Greece will probably have to identify and agree on those measures now. Tsipras is not off the hook.

It would not surprise me if the whole process takes longer than May 24th. There is a lot to do, especially between Germany and the IMF on the debt. Germany will have to make a fundamental decision. What is the lesser evil? Lose the IMF or make a binding commitment for debt relief? After everything thats happened over 6 years they wont let this fail now. I expect a deal when Greece is close to the brink but I dont think it will end the arguments over debt or austerity.

 

*Marcus Walker (@MMQWalker) is european economics editor and Athens bureau chief for the Wall Street Journal

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