Hardly an epilogue for Greece

What’s at stake: After much dispute, eurozone leaders decided this week to ask the IMF to finance a rescue package for Greece, one-third funded by the Fund and two-thirds funded by other members. If Greece is cut off from capital markets, it will be the IMF which will take the lead, to be followed by a second and third tranche from the EU – even though the conditions of the loan would be decided jointly by EU and IMF. The new agreement from this week's summit is being sold as a grand bargain of sorts: an offer of loans on suitably harsh terms to assure markets that a euro member cannot go bust, matched with toughened surveillance of national economic and budgetary policies and a degree of macro-economic co-ordination. There are no hard figures in the eurozone statements, but subsequent press announcements suggest a total of about €20 billion to €22 billion, or substantially enough (about 50 percent of the total estimated need) guaranteed financing to assist Greece in refinancing its needs during April and May. But if the Greeks can get funding but at a potentially ruinous 6-7%, the rest of the EU will not automatically step in. A week since the Greek deal, the yield on 10-year debt has actually risen.

Cédric Tille argues that the plan aims at showing to the markets that Athens has a second line of defence. The mechanism is similar to nuclear deterrence the only presence of which assures that we do not need to use it. But as the nuclear deterrence is made credible by the continuous presence of submarines offshore missile launchers, the credibility of the plan requires that more detailed information is supplied. However, the plan in its current form only amounts to intentions as many concrete elements miss. The concerned amounts were not indicated making attractive for markets to test the will of European governments to assign substantial amounts to the support for Greece.

Jacob Funk Kirkegaard also argues that quite possibly markets will want to test to find out the “threshold yield” for eurozone aid and points to several open ends that the eurozone agreement leaves. First is the issue of what will actually trigger any aid to Greece now that the distribution has been sorted out. Initially, Greece would have to request this direct bilateral aid from its partners with all the political stigma attached to it. Then the IMF and eurozone would seemingly disburse aid to Greece simultaneously, although it is far from obvious that the IMF, the huge eurozone representation on its board notwithstanding, would simply rubber stamp decisions made in Brussels to disburse money. Second is the issue of the conditionality of any eurozone aid. What does “insufficient market access” mean—400 basis points or 500 basis points above German bonds? If in reality extreme interest rates would be acceptable and a failed bond auction would be required to establish “lack of financial market access,” the trigger mechanism for eurozone aid would be an actual Greek default. Furthermore, the requirement for eurozone unanimity in triggering any disbursement introduces national vetos which is clearly more akin to the Chiang Mai Initiative in East Asia than EU qualified majority voting.

Wolfgang Munchau writes that this is not a true backstop, default still is. Lending to Greece at prohibitively high interest rates – which is what this agreement logically implies – is not a true backstop. Default still is – and at those conditions the point will come when Greece will find it financial more attractive default, perhaps after taking EU money, than to go through a programme which cannot succeed. The problem for Greece is that its economy is in far too weak a position to sustain such a massive fiscal retrenchment. It would require at the very least cheap bridging loans to tide the country over. As reported by Eurointelligence, Edward Hugh makes an additional point about the difference in loan rates between the IMF and the EU. If the EU loan were as low as the IMF loan, euro area countries like Spain would complaint, as they would be paying higher rates. But if the IMF loan rate is significantly cheaper than that of the EU, non-EU emerging market countries will complain as the IMF would be subsidising Europe.

The Economist argues that the likely bill for Greece’s bail-out looks larger than many are assuming. The newspaper runs some numbers and determines that Greece may need something like €75 billion, rather than the widely cited €25 billion, to get through the crisis. That may be too much even for the newly flush IMF as a €75 billion package would require the IMF to provide around 40 times Greece’s quota if the costs were split with the EU. Greece is likely to need five years to get its deficit down below 3% of GDP. According to their projections interest payments will rise from 5% of GDP to 8.4% in that time, to reflect the higher cost of issuing new debts and of refinancing old ones. Other budgetary cuts will be needed to offset this. The Greek government will have to increase the “primary” budget balance (i.e., excluding interest payments) by 13.5 percentage points of GDP to cap its debt burden. That is bound to have an effect on growth.

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