The Latest Greek Deal: An Excel Sheet Fantasy

A new agreement has been reached between Greece and its creditors regarding its bailout program. Jeroen Dijsselbloem, president of the Eurogroup, has described it as “ambitious” and a “major breakthrough”. However, a look at the details shows that it’s anything but. This agreement follows the Eurogroup’s time-honored tradition of kicking the can down the road as political considerations have once again trumped economic logic. Greece has to continue its commitment to unrealistic fiscal targets while debt relief is expected to take place somewhere and somehow down the line and, all the while, the future of the country continues to be decided by political calculations within the Eurogroup. Like its predecessors, this new version of the Brussels fudge will buy some time but ultimately fail in its stated goal of ensuring growth and stability for Greece.

This was entirely to be expected, as earlier discussions had made clear that any agreement on debt relief would be the result of a difficult balancing act. On one side, Germany was clearly opposed to any significant debt relief measures. Furthermore, if these were to be considered at all, it would be after the program ended and only if seriously required. On the other, the IMF made its continued participation conditional on guaranteeing the sustainability of Greek debt. Given the dire economic prospects of Greece, explained in detail in the preliminary Debt Sustainability Analysis (DSA) published by the IMF before the Eurogroup meeting, the scale of measures on debt relief it envisioned was clearly incompatible with the German position.

Purely cosmetic

The agreement underlines that this divide was too wide to be bridged in a meaningful way. In concrete terms, it delays once more the adoption of significant measures that ensure debt sustainability by providing short-term relief to the country. This includes the disbursement in stages of €10.3bn in bailout funds, subject to further minor requirements. It also involves modifications to the repayment profile of EFSF loans. Compared to the measures proposed by the IMF, these can only be described as cosmetic changes.

From this perspective, the clash between the IMF and European authorities regarding the viability of the medium term fiscal targets for Greece remains unresolved. The agreement follows the German line by putting off further debt relief measures till after the program ends in 2018. As part of this commitment, the country is expected to achieve and maintain in the medium term a primary fiscal surplus of 3.5% of GDP. Thus, even if Greece actually manages to fulfill the required conditions, any debt relief would be based on a excel sheet fantasy.

This is precisely the IMF’s argument. The DSA document explains in no uncertain terms the myriad obstacles faced by Greece to achieve and maintain the primary surplus on which this agreement is based. They range from tax collection issues via political uncertainty to absence of meaningful historical examples of countries able to accomplish what is being requested of Greece. The IMF’s skepticism regarding the viability of the fiscal targets translated into a request for upfront and unconditional debt relief that includes payment deferrals until 2040 and stretching debt repayments until 2060. By way of contrast, the debt relief measures included in the agreement are gradual and conditional. In this regard, just because there was a deal this doesn’t remove the fact that the fiscal targets set for the country are, in the IMF’s own words, “unrealistic”. It just postpones the recognition of this problem past the Brexit vote, the last months of the Obama presidency and, most important, the German elections of 2017.

What’s more, continued IMF participation in the program is still subject to approval by its Executive Board before the end of this year. Thus, the Board will be presented with a program built on a series of “unrealistic” macro assumptions and encompassing debt relief measures that would only become effective after 2018 and hence cannot be quantified at this stage. The uncertainty of the whole exercise is compounded by the fact that those debt relief measures require another round of Eurogroup discussions and approval.

Given that the new IMF lending criteria for large-scale programs now require that debt is considered sustainable with a high degree of probability, it’s difficult to see how the staff can justify such an assessment, much less obtain the Board’s say-so.. As European authorities still insist on IMF participation, this problem will most likely be side-stepped: a provision of the agreement refers to the use of available ESM funds to repay outstanding IMF loans. This would enable a reduction in the scale of financial assistance provided by the IMF to Greece, allowing it to waive the debt sustainability requirement and continue to participate in the program.

However, this approach is itself not without problems. The most obvious is the impact the IMF’s credibility would face if it allowed a country member to linger on in insolvency as long as the body faced no financial exposure itself. This would contradict its raison d’être. Furthermore, image considerations aside, the funds that are required to perform the buyout of the IMF might already be compromised. The IMF’s DSA makes clear that the Greek financial system is far from sustainable and that, on top of the €43bn that have been used to recapitalize banks since 2010, an additional €10bn will be needed for this same purpose.

Far from resolved

In this context, the agreement has already failed in terms of establishing a credible framework to ensure the Greek economy’s recovery. One of the key arguments to provide upfront and significant debt relief to a country is to create the conditions that allow investment to recover by eliminating the uncertainty attached to insolvency. However, by delaying debt relief and making it conditional on unrealistic targets, this agreement does the exact opposite. As things stand, Greece is expected to continue increasing taxes and cutting expenditures to the point of risking the viability of basic public services. At the same time, debt relief is postponed, made vague and subject to political outcomes. It’s difficult to see how this package would be conducive to create anything resembling an attractive environment for investors.

It’s troubling that six years into the crisis, the best the Eurogroup can do is to delay once more a definitive solution to the Greek debt problem. This is yet more evidence that the current institutional structure of the EU is unable to deal with the scale of economic problems caused by an incomplete monetary union: an ill omen for the future of Greece and, indeed, the EU.