The new deal on Greece's bailout makes it clear that a series of small fixes will become a permanent feature in the save-Greece campaign because no European government or institution is willing to take big losses on its Greek bonds.
Early Tuesday, after yet another marathon negotiating session by euro zone finance ministers, Greece emerged with an overhauled program. But it is conditional, incomplete and, crucially, does not remove the crushing weight of austerity on the economy, now entering its sixth year of recession.
Many economists considered it little more than another round of tinkering designed to keep Greece in the euro zone for another year or so, or at least until next year's German elections, not the permanent fix that would eventually make Greece's economy sustainable without international financial assistance.
ING economist Carstsen Brzeski said "the euro group [the euzo zone finance ministers] provided the expected fudge to keep Greece in the euro zone. It is obvious that even the euro group does not expect that this was the last word on Greece."
Toronto-Dominion Bank had a similar view. "This provides some immediate relief, but it does not remove the risk of a more dramatic debt restructuring in the coming months," said TD economist Martin Schwerdtfeger.
Greece's long-delayed new package came only a few weeks before the government faced shutdown for lack of funds. It is a mish-mash of proposals that, if approved by national governments of the 17-member euro zone and the International Monetary Fund, which is the co-sponsor of Greece's first two bailouts, will trigger the payout of €43.7-billion over the next four months.
Differences over debt targets had held up the package for months, with the IMF demanding a lower target than the euro zone on its ratio of debt to gross domestic product. In the end, a compromise was reached. The new package is designed to reduce Greece's debt to 124 per cent of GDP by 2020 (the IMF had sought 120 per cent) and less than 110 per cent by 2022. Before then, however, Greece's debt-to-GDP is expected to rise substantially, as negative growth persists. In 2016, debt should rise to about 175 per cent of GDP, a figure that may prove conservative if Greece's economy continues to sink at alarming rates.
The centrepieces of the new rescue package are interest rate reductions and maturity extensions on tens of billions of euros of loans from the previous bailouts. About €56-billion in loans from the first bailout loan facility will see a 1 percentage point interest-rate reduction. Rather absurdly, this will see struggling countries such as Italy and Spain, whose sovereign bond yields are much higher than the euro zone average, borrow money at high rates in order to lend it to Greece at low rates.
The bilateral loans and the loans from the old bailout fund, the European Financial Stability Facility (EFSF), will have their maturities extended by 15 years while interest payments on the second bailout will be deferred by 10 years. On top of all this, the euro zone governments have agreed to forfeit some €7-billion of profits on the Greek bonds held by the European Central Bank. Those profits will be sent back to Athens.
The proposed buy-back of about €62-billion of distressed Greek sovereign bonds, which are trading at about one-third of face value, remains the big outstanding issue, to the point that the IMF warned it would not release its portion of the overdue loans unless the buy-back is complete. If it works – no details of the proposed transaction were available – Greece's debt would fall by about €40-billion. The euro zone hopes to have the buy-back worked out by mid-December.
Whether the package will do more than buy time is an open question, especially with the Greek economy in near free fall. Deutsche Bank expects Greece's GDP to sink 6.6 per cent this year and 4.1 per cent in 2013. None of the measures in Tuesday's new bailout agreement address the austerity programs, which are pushing down consumer demand and raising unemployment.
Nor did it open the door to outright debt forgiveness, which would require the ECB and euro zone governments to write off or write down substantially the value of their Greek bond holdings. This so-called public sector involvement has been rejected by ECB president Mario Draghi.
"The big problem with the Greek deal is that it doesn't tackle the underlying austerity gap which dooms Greece to a seemingly never-ending cycle of recession and poor public finances," Société Générale's foreign-exchange team said in a note. "But then, as one wit put it, the deal doesn't provide a solution to cancer either."