Blog Post

Greek glass: half-empty or half-full?

At marathon-meeting yesterday, European finance ministers agreed on a new debt deal for Greece, supported by the staff-level agreement of troika of European Commission, European Central Bank (ECB) and the International Monetary Fund (IMF). The main elements of the deal are the following: “The adoption by Greece of new instruments to enhance the implementation of […]

By: Date: November 27, 2012 European Macroeconomics & Governance Tags & Topics

At marathon-meeting yesterday, European finance ministers agreed on a new debt deal for Greece, supported by the staff-level agreement of troika of European Commission, European Central Bank (ECB) and the International Monetary Fund (IMF). The main elements of the deal are the following:

  • The adoption by Greece of new instruments to enhance the implementation of the programme, notably by means of correction mechanisms to safeguard the achievement of both fiscal and privatisation targets, and by stronger budgeting and monitoring rules” – yet no further details are available;

  • A strengthened segregated account for debt servicing – which echoes the German demand for an escrow account;
  • Endorsement of the postponement of a primary surplus target of 4.5% of GDP from 2014 to 2016, which was agreed earlier;
  • Bailing-in subordinated bank bond holders during the bank recapitalisation process;
  • Buy-back of privately held debt at prices “no higher than those at the close on Friday, 23 November 2012”;
  • Reducing the lending rate on bilateral loans from 150 basis points over the 3-month Euribor to 50 basis points (expect by other euro-area countries which are under financial assistance);
  • A lowering by 10 bps of the guarantee fee costs paid by Greece on the European Financial Stability Facility (EFSF) loans;
  • An extension of the maturities of the bilateral and EFSF loans by 15 years;
  • A deferral of interest payments of Greece on EFSF loans by 10 years – yet no further details are available, such as the repayment schedule of these deferred interest payments;
  • The full transfer of ECB profits to Greece from the Securities Markets Programme (SMP) starting in 2013 (expect the profit which is allocated to other euro-area countries under financial assistance);
  • Further measures will be considered “when Greece reaches an annual primary surplus, as envisaged in the current MoU [Memorandum of Understanding of the financial assistance programme], conditional on full implementation of all conditions contained in the programme”;
  • € 43.7 billion loans will be disbursed to Greece by the EFSF in four tranches during the coming months, conditional on the implementation of the MoU;
  • The IMF will consider the disbursements of its remaining commitments to Greece “once progress has been made on specifying and delivering on the commitments made today, in particular implementation of the debt buybacks” (see the IMF press release here).

It is expected that these measures will reduce the debt-to-GDP ratio from 144% troika’s baseline to 124% by 2020 and below 110% by 2022.[1]

These measures are sensible and broadly in line with my earlier suggestions, but less ambitious. I proposed that in addition to curtaining the fiscal sovereignty of Greece further and some straightforward debt-reducing measures, such as transferring the ECB profits to Greece, extending the maturities of all official loans, and attempting to buy-back privately-held bonds, the official lending rates should be reduced to zero (and Greece should pay back this interest subsidy beyond 2030) and the notional amount of all official loans should be indexed to Greek GDP. Thereby, the debt ratio would have fallen below 100 percent of GDP by 2020 irrespective of GDP developments till then.

The new Greek deal has two readings.

First, there is a major risk in the success of the buy-back initiative and the 124% debt-ratio target by 2020 is not ambitious enough.

  • There is no clarity about the details of the buy-back initiative, apart from the wish to conduct it at prices not higher than the market prices of 23 November 2012 (which were between 25 and 34 cents to the euro for the various maturity new Greek bonds; see the annex of my paper for details about the new Greek bonds). Since the new Greek bonds are under the English law and are safeguarded with a co-financing agreement with EFSF, the incentives for bond holders to sell their holdings at such low prices would likely be low. The IMF conditioned its continued support to Greece on the success of the buy-back initiative, among others.
  • Also, the earlier 120 percent of GDP debt target by 2020 has proved to be inadequate for restoring trust and thereby limiting the probability of a Greek euro exit. A reiteration of a similar target is unlikely to help, as I argued here. That could just prolong economic and social misery and the uncertainty about Greek euro membership.

But there is a second reading of deal as well.

  • European lenders expressed their strong determination to keep Greece inside the euro area and suggested considering “further measures and assistance” when Greece will reach a primary surplus, conditional on the fulfilment of the financial assistance programme conditions. This could improve market sentiment and thereby support a quick rebound in output, because deep contractions used to be followed by quick recoveries and the Greek GDP has collapsed by almost a quarter.

Which of the two readings will be shared by the private sector? My fear is that the first one will dominate. In that case, as I argued earlier, investment could be deterred further, the gradual capital outflow could continue, economic performance could remain weak, employment could fall further, and the social pressure on the government and the parliament could increase. In the wake of a prolonged contraction, the current coalition government may collapse, leading to domestic political paralysis and the chain of events leading to a euro-exit with disastrous consequences inside and outside Greece.

A perfect implementation and a lot of luck will be needed for turning the sentiment from the first to the second reading.

[1] Note: my own baseline calculation indicated a debt-to-GDP ratio of 146% by 2020, quite close to the troika’s baseline of 144%.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More by this author

Blog Post

Zsolt Darvas

Single market access from outside the EU: three key prerequisites

In relative terms, Norway’s current net financial contribution to the EU is similar to the UK’s. Switzerland and Liechtenstein pay surprisingly little, while Iceland is a net beneficiary. Relative to their population, Switzerland, Norway, Iceland and Liechtenstein received about twice as large an inflow of EU immigrants as the UK. These countries also have to adopt the vast majority of EU regulation to gain access to the single market.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: July 19, 2016
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

The difficulties of defining EU-UK economic relations

Negotiations on the UK's exit from the EU have not yet begun, but the UK leadership needs to find a balance between single market access and free movement. There are also tensions between the demands of voters and what EU partners can plausibly agree. Guntram Wolff doubts the likelihood of a Norway- or Switzerland-style deals, and urges caution on all sides.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 19, 2016
Read article More on this topic More by this author

Blog Post

Marek Dabrowski

Iran: from isolation to economic cooperation

With some sanctions temporarily lifted, now is the chance for Iran to reintegrate into the global economy and political system. But comprehensive economic and political reforms are needed.

By: Marek Dabrowski Topic: European Macroeconomics & Governance Date: July 15, 2016
Read article More on this topic More by this author

Blog Post

Zsolt Darvas

Brexit vote boosts case for inclusive growth

In the United Kingdom’s Brexit referendum, income inequality and poverty boosted ‘leave’ votes, in addition to geographical differences and larger shares of uneducated and older people in UK regions, according to my regression analysis. The actual presence of immigrants did not have a significant effect on the results. Disadvantaged people voted in smaller proportions. Turnout was also low among the young and residents of Scotland, Northern Ireland and London, who were more likely to vote ‘remain’.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: July 13, 2016
Read about event More on this topic

Past Event

Past Event

Does the euro area need a sovereign insolvency mechanism?

The sovereign debt crisis shook the Euro to its foundations. It soon became clear that there was no mechanism to allow a tidy insolvency of a state wishing to remain inside the euro area. To face future crises, does the EU need a sovereign insolvency mechanism?

Speakers: Jochen Andritzky, Lars Feld, Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The great risk shift and populism

What’s at stake: For many commentators, Brexit was the signal of a broad populist backlash and illustrated the need to articulate policies that address the grievances of those citizens who have been left behind by recent economic changes.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: July 11, 2016
Read article Download PDF More on this topic More by this author

Policy Contribution

Cover

An Italian job: the need for collective wage bargaining reform

Italy’s current system of centralised wage bargaining needs to be reformed. The system was designed without regard for the underlying industrial structure and geographical heterogeneity of the Italian economy. This has fostered perverse incentives and imbalances within Italy.

By: Alessio Terzi Topic: European Macroeconomics & Governance Date: July 6, 2016
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

市场与公投承诺不可兼得

未来几个月市场的动荡还将持续,直到英国与欧盟关系的条款最终敲定。英国与欧盟保持密切关联的政治可能性越高,市场反应将会越积极。相反,如果英国采取孤立主义,以及欧洲大陆的惩罚性情绪越高,那么英国和欧盟的股市下跌将会越严重。

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 6, 2016
Read article More on this topic More by this author

Opinion

Schoenmaker pic

登录 注册 丢了“欧盟护照”伦敦金融城伤不起

 作为全球金融中心,伦敦一部分的吸引力来自于其窗口作用——在伦敦扎根可以直接打入泛欧洲经济区(EEA)的内部市场。这么说来,金融企业有一个英国经营牌照就如同有一本“欧盟护照”,境外机构可以在整个欧洲经济区提供金融服务,畅通无阻。

By: Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: July 5, 2016
Read article More on this topic More by this author

Blog Post

Dalia Marin

Inequality in Germany – how it differs from the US

The pay gap between workers and CEOs in Germany is driven by a lack of managers. Income inequality could fall if there were more managers available for companies to hire. Firms should start hiring more CEOs who are women or from abroad.

By: Dalia Marin Topic: European Macroeconomics & Governance Date: July 5, 2016
Read article More on this topic

Blog Post

Alvaro Leandro
jaume

Spanish unemployment and the effects of the 2012 labour market reform

What’s at stake: Spain is currently the EU country with the second highest level of unemployment, after Greece. The high and persistent level of unemployment and the appropriate labour market reforms are a major topic of discussion in Spain. We review arguments made in the blogosphere and by international organisations on the reasons for Spain’s stubbornly high unemployment, and various assessments of the labour market reforms of 2012.

By: Alvaro Leandro and Jaume Martí Romero Topic: European Macroeconomics & Governance Date: July 4, 2016
Read article More on this topic More by this author

Blog Post

Zsolt Darvas

No Lehman moment on currency markets after Brexit vote

While the pound sterling has lost a lot of its value right after the Brexit vote, from a historical perspective neither the fall of the exchange rate, nor its current level, is unprecedented. The situation is not as severe as it was in the aftermath the collapse of Lehman Brothers.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 30, 2016
Load more posts