The Greek debt deal Thumbs down AFTER another all-night summit, a deal between Greece and the troika (the EU, ECB and the IMF) has finally been reached. It involves the expected combination of measures - a private sector write-down, more loans from the EU in return for austerity measures and enhanced monitoring of Greek compliance. After all that effort, Greece will still have a debt-to-GDP ratio of 120%, which looks more than it can afford.
Markets have duly been unimpressed today, although of course a deal may have been priced in. But the FT
story about a confidential paper on Greek finances only illustrates that this is a short-term fix and that further bailouts will be necessary.
It is hard to find an analyst who is impressed with the deal. First, there is the issue of overoptimistic forecasts. Lombard Street Research writes that
The troika assumes that the new austerity policies will improve the Greek public finances but have only a modest impact on economic growth. In their baseline scenario, GDP is expected to contract by just over 4% in 2012 and then stabilise in 2013 before growing robustly (at over 2% pa) thereafter. This, of course, is ludicrous and runs counter to all the evidence accumulated over the past couple of years.
This is probably the last Greek bailout we will see, but not for the reasons the authorities are claiming. Neither the Greeks nor the EU will have the patience for another round of negotiations once this latest package unravels.
David Owen at Jefferies points to the alternative forecast in the leaked report which sees the debt/GDP ratio in 2020 at 159% and comments that
the assumptions which feed into this are not particularly onerous - marginally weaker growth, slightly slower fiscal adjustment and less rapid pace of asset sales. And so from this leaked document comes a damning sentence which really sums up what the markets should take away from today: "With debt ratios so high in the next decade, smaller shocks would produce unsustainable dynamics, leaving the programme highly accident-prone."
And what kind of precedent does this set for other European bailouts? At M&G, fund manager Richard Woolnough notes bitterly that
The (deal) ensures that the private sector will suffer a real loss while the public sector (national European central banks and the ECB) will not suffer any losses. Central banks have this privileged position as they are prepared to provide further finance to Greece (akin to a rescue rights issue diluting existing shareholders). Of course, it is not in the politicians' interests for the central banks to bear any losses as a result of lending to Greece and of course it is the politicians that set the legal and regulatory framework. Not only can politicians change the goal posts, they can change the ball you are playing with. Politicians, and the authorities, are exercising their embedded power.
This deal will cause the private sector to suffer a disproportionate level of losses both in absolute and relative terms to the public sector. This punishes the private sector investor in Greek debt relative to the private speculator who was short Greek debt
Finally, there is the issue of whether Greek politicians can really impose this deal on their electorate. At Capital Economics, Jennifer McKeown predicts that
with the recession thwarting debt reduction efforts and public outrage growing, we still see Greece leaving the euro-zone before the year is out.
Greek Bailout XXIII
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Originally Posted by Loki
