Tuesday, February 21, 2012

It looks like a deal, it walks like a deal, it is almost a deal.

Last night’s Eurogroup meeting has paved the way for a second Greek bailout but the crisis marathon is not over.

A marathon meeting in the never-ending marathon of the Eurozone debt crisis. After more than 13 hours, Eurozone finance minsters last night agreed to a roadmap and a blueprint for a second Greek bailout package. In a joint effort last night, more private and public sector money was found to reduce Greece’s debt burden, aiming at bringing the Greek debt-to-GDP ratio down to 120.5% by 2020. The money will come from a haircut on bonds held by the private sector, an retroactive lowering of the interest rate on the first Greek bailout package, an accounting trick to use profits by national central banks on their Greek bonds held in their investment portfolio and, finally, the profits by the ECB on its Greek bonds under the SMP programme. However, the ECB participation remains a very indirect and vague one and is more a merry-go-around of government money. Governments could already now give money to Greece equal to future income from their national central banks stemming from portfolio investments. Moreover, the ECB could mark the profits it makes on its Greek bond holdings under the SMP programme, potentially selling them to the EFSF, and redistribute the profits to national central banks. Governments “may” use these proceeds to reduce Greek debt.

Notably, in the official Eurogroup statement there were still a couple of “welcomes”, “intentions” and “mights”, indicating that some effort is still needed to eventually sign off the second Greek bailout in early March.
A successful PSI is the first prerequisite. The Greek authorities and the private sector have agreed on the general terms of an PSI exchange offer. The offer involves a 53.5% reduction in the face value and would involve official sector support of 30bn euro. This could lead to a reduction of Greek debt by around 107bn euro.
The second prerequisite is a further loss of Greek sovereignty. There will be a permanent presence by the European Commission in Greece to increase on site-monitoring of Greek progress. Moreover, the Greek authorities intend to set up an escrow account for the second bailout money to ensure that priority is granted to debt servicing payments.

After a period of increased irritations and controversial discussions, it looks as if the Eurozone once again took another important step in the debt crisis. If all prerequisites are fulfilled, a second bailout package for Greece, amounting to up to 130bn euro until 2014 could be signed in early March. The biggest part of this package would be paid by the EFSF, the IMF contribution is still undetermined.
Last night’s principle agreement on a second bailout package for Greece is an unprecedented decision to bring a Eurozone country’s public finances back on a sustainable path. Greece should be saved, at least for the next couple of months. However, the feeling of relief is not likely to last for long. There are still many uncertainties and potential stumbling blocks in the Eurozone’s debt crisis marathon run. In the short run, several national parliaments, above all the German, Dutch and Finish parliaments will have to agree to the bailout package. Moreover, private bondholders will have to agree to PSI. If not, a forced haircut would be an alternative. Even more important, the potential stumbling blocks in the medium run look even bigger and harder to master. The quarterly spectacle of whether nor not the Greek are on track with their austerity measures and structural reforms will continue. Backlashes are almost built-in. So far, the return of economic growth in Greece is largely based on the principle of wishful thinking. The combination between more austerity, social unrest and European impatience could become explosive, with a high risk that the Greek crisis could still derail.

All in all, the bottom line of all this is that the Eurozone provides conditional financial support but Greece has to forge its own destiny. With the second bailout package, the Eurozone has again bought time for other peripheral countries to show that they are different and to put all available anti-contagion firewalls into place. The often-cited Greek can has again been kicked down the road. Good thing is that it the can is still on the road but it requires a huge amount of stamina and patience to keep it there.

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