After a long night of discussions, the eurogroup agreed on a new deal for Greece. The main elements consist of a larger contribution of the private sector and a larger contribution of the public sector with the aim to bring back Greek debt on a sustainable path. The agreement involves a PSI exchange offer with a nominal haircut of 53.5% and the approval of further structural expenditure reductions of € 325 million by the Greek parliament, aimed at closing the fiscal gap in 2012. It was agreed that the ECB’s profit on bonds held under the SMP will be disbursed to the NCBs, in line with the ECB’s statutory profit distribution rules and NCBs’ profits will be disbursed to euro area Member States. Moreover, certain government revenues from these SMP profits may be allocated by Member States to further improving the sustainability of Greece's public debt. All Member States have agreed to lower retroactively the interest rates of the Greek Loan Facility so that the margin amounts to 150 basis points. Moreover, Member States where central banks currently hold Greek government bonds in their investment portfolio has committed to pass on to Greece any future income that should accrue to their national central bank stemming from this portfolio until 2020. Taken together, the PSI and the official sector contribution aim to bring Greece's public debt ratio back on a downward path reaching 120.5% of GDP by 2020, and allowing for the approval of the second 130bn bailout.
So is this the end of the eurozone crisis? A number of points are worthwhile highlighting:
- A disorderly default of Greece has been prevented and the threat of Greece leaving the euro is gone for now. This is the most important point and a big success of the deal. A major catastrophy for Greece and the eurozone has been prevented.
- The Greek government debt will stop being a major source of financial stability concern for the euro area. After the PSI deal and with the newly agreed public sector loans, the private sector will largely stop being exposed to Greece. Any future debt restructuring will have to come from the public sector. Official sector involvement (OSI) will be politically difficult but it will not be a problem for the stability of the financial system.
- Details matter and some details still need to be clarified. In particular, the PSI has been agreed by those around the table yesterday. There is still a debate on collective action clauses and how these will play out. This is to be watched in the coming days. The debt sustainability is also not yet guaranteed and I expect there to be further discussions in case of negative shocks with more OSI.
- Greece still lacks a good growth perspective. While the deal has avoided a catastrophic scenario, the highest priority now needs to be to offer opportunities for growth. Ultimately, this growth will have to come from exports. To get exports growing, an increase in competitiveness and an internal devaluation are necessary. The better policy measures will be implemented for that purpose, the easier will be the real economic adjustment and also the political dynamics.
- The decision to give priority to debt repayments via an escrow account is understandable. It is a binding constraint on the degree of political choices in Greece right now. It is, however, a risky strategy from a political point of view. This may be accepted now as Greece is with the back to the wall. Maybe, the political view may change in the future, also with the new elections. At that stage, the Greek government may want to re-negotiate the deal. The escrow account will likely be a focal point of political and public resistance against foreign involvement in the country and the question of its democratic legitimacy will arise.
Overall, the deal is a very important step for solving the eurozone crisis as it has reduced one of the major sources of uncertainty. However, the crisis is clearly not solved. The greatest risks going forward appear to be coming from the largely absent real economic adjustment, the continuous fragility in the eurozone banking system and the political dynamics resulting from the weak growth dynamics.