The end of the marathon?

“I HAVE learnt that marathon is indeed a Greek word.” Thus spoke Olli Rehn, the European monetary affairs commissioner, at the end of a 14-hour negotiating session that produced a second bailout package for Greece this morning.

This had been agreed in principle at a European summit in July last year. But political turmoil in Greece, hesitation in the euro zone—and an ever-worsening fiscal hole caused by an ever-deepening recession—made the deal elusive for months.

It was concluded before dawn this morning after finance ministers, the European Central Bank and representatives of private creditors squeezed the numbers to produce a package that was deemed both politically acceptable to creditors and provided Greece with something it reckoned to be sustainable.

As explained in my earlier post, the negotiators were working within self-imposed constraints. According to the final statement, the deal is expected to bring down Greece’s debt ratio to 120.5% of GDP in 2020, while requiring no more than €130 billion ($173 billion) in additional finance in the coming two years. To square the circle, ministers have applied the file to several aspects.

– Private creditors have accepted a haircut of 53.5% of the nominal value of Greek bonds they hold, plus a reduction in the coupon for new bonds, starting at 2% and rising to 4.3% from 2020. This amounts to a loss of net present value of about 75% (up from the 21% originally agreed in July).

– A 50 basis-point reduction in interest rate charged by euro-zone members on their bailout loans to Greece, applied retroactively. This is justified by reference to the profits that will be made by the European Central Bank (ECB) on the discounted bonds it had bought earlier in the crisis. This will be redistributed to national central banks, which will pass them on national governments. This roundabout flow is to avoid any semblance of monetary financing of Greece.

– By contrast, governments promise to pass on directly to Greece any profits made by their central banks on Greek bonds they currently hold.

All this is made conditional on Greece completing a set of “prior actions” by the end of the month—for example, reducing the minimum wage to make labour markets more flexible—and submitting to an “enhanced and permanent” monitoring of European Commission officials in Greece.

In particular, Greece will be expected to deposit a quarter’s worth of debt-service payments into a “segregated account” that will be monitored by the troika (made up of the commission, the ECB and the IMF). Over the next two months Greece has promised to adopt legislation “ensuring that priority is granted to debt-servicing payments”, with a view to enshrining this in the constitution “as soon as possible”. These arrangements may not amount to the budget  “commissar” once threatened by some creditors, but the effect may be pretty much the same.

Christine Lagarde, the IMF head who attended the meeting, declined to say how much her organisation would contribute. But it is clear it will be not be the one-third share that the IMF has so far borne in euro-zone bailouts.

Mrs Lagarde also made clear that the IMF’s view would be coloured by whether the euro zone creates a more credible firewall against contagion. This would be done by allowing the current temporary rescue fund, with about €250 billion of lending capacity, to run alongside a permanent new system with about €500 billion. A decision is expected at a European summit on March 1st.

The euro zone claims all this amounts to “a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing”. But a leak of the troika’s debt-sustainability analysis makes clear that the second bailout may well fail. In adverse conditions, ie if Greece does not enact structural reforms, the debt ratio could remain at 160% of GDP in 2020. The politics of imposing a near protectorate on Greece may turn yet more poisonous (see my earlier post on the depiction of German leaders as Nazis.)

Mrs Lagarde makes no secret that there are “downside risks”. But she argued that, by placing greater focus on reforms to boost Greece’s productivity—rather than simply on reducing the budget deficit—Greece will have a better chance of returning to growth. European assistance and close monitoring increases the chance of success.

Still, helping Greece remains a huge gamble, and today the euro zone has just agreed to double its stake.