Third time lucky?
Another step away from the brink for the euro s perpetual delinquent
Aug 15th 2015
JUST one month ago Greece was on the verge of leaving the euro. Germany had
raised the prospect of a time out lasting at least five years, following a
breakdown in trust between euro-zone countries and the Greek government. Even
when an acrimonious weekend summit in Brussels ended on July 13th with a
tentative plan for a third bail-out, providing up to 86 billion ($96 billion)
over three years in return for further austerity and reforms, there was
widespread pessimism about whether a more detailed agreement could really be
reached. Yet on August 11th the Greek government settled the specific
conditions of the rescue with the four institutions representing the interests
of creditors: the European Commission, the European Central Bank (ECB), the IMF
and the European Stability Mechanism (ESM), a rescue fund for the euro zone.
The new proposals were due to be passed into law by the Greek parliament on
August 13th, after The Economist had gone to press. The hope among Greek
officials was that euro-zone finance ministers would endorse the deal the
following day. That could in turn pave the way for a release of funds from the
ESM in time for the Greek government to redeem bonds held by the ECB worth 3.2
billion when they mature on August 20th.
This timetable may yet prove too optimistic. The agreement will still have to
be ratified by several euro-zone parliaments, including the German Bundestag.
Despite the surprisingly swift progress in the negotiations, the German
government has struck a cautious tone, arguing that thoroughness is more
important than speed. If Germany drags its heels, Greece may need a second
emergency loan from a rescue fund backed by the whole of the European Union in
order to repay the ECB (it received a first one in mid-July to clear arrears
with the IMF and repay another lot of bonds held by the ECB). The question of
relieving some of Greece s huge public debt, to be addressed once the bail-out
has been agreed, is another potential pitfall: the IMF has made clear it
requires European concessions on this point if it is to join the bail-out later
this year.
In order to get this far, Greece has already had to legislate two sets of
reforms in the past month. These have raised VAT and made minimum pensions
payable only at the age of 67. A European directive on dealing with failing
banks has been adopted and the independence of the national statistics agency
has been reinforced. Judicial delays are also to be tackled.
This week s agreement includes steps to liberalise markets, especially energy.
Tax administration is to be overhauled with tougher procedures to deal with
taxpayers who are in arrears. A new privatisation fund is being set up, with
the objective of eventually raising 50 billion, of which half will go to
recapitalise Greek banks, a quarter to pay down debt and the remaining quarter
to investment. Privatisation is expected to raise up to 6.4 billion between
2015 and 2017, an ambitious target given that Greece has managed to raise only
3 billion in the past five years.
Daily dispatches: What news from Athens?
Important though such structural reforms may be in improving Greece s long-term
prospects, what matters in the short term is healing a traumatised economy that
has slipped back into recession and is fettered by capital controls. One
encouraging sign is that the creditors have not imposed overly harsh fiscal
targets for this year and next. Greece is expected to run a primary deficit
(ie, excluding interest payments) of 0.25% of GDP in 2015 and a surplus of 0.5%
in 2016. Another helpful development is an acceptance on the part of euro-zone
creditors that attempts to impose a bail-in to recapitalise the banks (by
converting large deposits into equity) would be wholly counter-productive since
this would destroy the working capital of Greece s small businesses.
Yet even if the hurdles to a full agreement can be surmounted, the outlook for
Greece remains precarious. Despite the recent promising developments, the risk
of more political upsets remains very real. The decision by Alexis Tsipras,
Greece s prime minister, to accept the bail-out terms has split his party,
forcing him to rely upon opposition parties to pass legislation. That may lead
to an early election. Chronic political uncertainty was a crucial reason why
Greece s first two bail-outs went wrong. It may also blight the third.