Greek Debt Deal: Five Problems It Doesn't Solve
There are only three greater sources of confusion in the world than what's going on in Greece, and they are all found in quantum physics, David Lynch films and Ikea instruction manuals.
So we're a little nervous trying to tell you what we think will come next in Greece, and maybe the rest of the euro zone, after this weekend's deal to solve that country's short-term risk of collapsing into a big pile of debt and classical debris. But here goes.
Here's the main thing you need to know, and it's an easy one: This doesn't solve all of Greece's problems. Not by a long shot. It's still got quite a few problems. In fact, Greece is a living exception to what scientists call the Notorious B.I.G. Conundrum: It has less money, and yet it also has more problems.
"The one thing that is clear is that even if this bailout is ‘successful,’ it will set Greece up for a decade of painful austerity and low growth leading to social unrest," wrote the Open Europe blog, "while the eurozone will have to provide on-going transfers to help it keep its head above water."
To put it another way, as Christopher Vecchio, Currency Analyst at DailyFX did this morning in a note:
"At the end of the day, considering how perfectly in place the pieces will need to fall for this bailout and said reforms to make the necessary changes to help revitalize the Greek economy, I do not believe that a Greek default is off the table."
Problem One: Greece still has to get a lot of its private lenders to agree to take massive losses on its debt. A body called the Institute of International Finance has negotiated a deal that would have private creditors forgive 53.5% of the debt they hold, in exchange for some new Greek debt, some bonds issued by Europe's bailout authority and a version of Eurozone Crisis: The Home Game.
The problem? The IIF may not exactly speak for all of Greece's private creditors. The new loan to Greece assumes 95 percent participation by private creditors in the debt swap the IIF negotiated. Most analysts think this is a pipe dream. Without that sort of participation rate, Greece could have a harder time paying its debts and need yet another bailout.
There are also still the open questions of whether private investors will want to buy Greek debt in significant numbers again, and whether insurance policies investors have bought to hedge against a Greek debt default will be triggered.
Problem Two: Other euro-zone countries still need to approve Greece's latest round of financing. As we have seen repeatedly, this is the recipe for sturm und drang in parliaments throughout the euro zone.
"This may be more contentious than a rubber stamp," wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in an email. "While this may be the case in the creditor nations as whole, it may be particularly true for Germany."
Problem Three: Greece still has to jump through several hoops of austerity fire in order to get this money. That will be unpopular with the Greek public, and may be impossible to pull off. It will also likely doom Greece's economy to a more-prolonged stretch of misery.
"The economy is immersed in an ‘austerity trap,’ where fiscal austerity and a deep recession feed each other with dire consequences," IHS Global Insight analysts wrote.
And more economic weakness could again knock Greece's already shaky fiscal house into greater imbalance, according to a sustainability analysis put together by the ECB, European Comission and the IMF (a/k/a "the Troika") and leaked to the press on Monday, raising the need for another bailout.
Problem Four: One of the highest hurdles for Greece is a demand that it change its constitution to make debt payment the government's highest priority.
Trouble is, Lombard Street Research points out, the Greek constitution cannot be changed until May 2013, five years after the last change to the Greek constitution. Who says this? The Greek constitution.
"The Greek Government can promise a Constitutional revision," LSR wrote in an email. "It cannot deliver for over a year, during which the pernicious consequences of the suicide pact will be obvious to all."
Problem Five: Even if everything goes as planned, Greece's debt-to-GDP ratio will still end up at 120 percent, according to the Troika's forecast. That is not sustainable, particularly if Greece's economy is still mired in recession/depression.
"That is clearly a significant improvement on the current level of 160 percent," writes Dario Perkins at Lombard Street Research in London, "but I don’t recall anyone believing it was sustainable last time it was around that level in 2009."
To make matters worse, Perkins notes, the Troika's forecast is based on unbelievably rosy assumptions about Greece's economy. He notes that Greek GDP shrank by 7 percent in 2011, a year in which Greece was supposedly not enthusiastic enough about austerity. The troika assumes a more-austere Greece is going to shrink by just 4 percent in 2012 and then enjoy a U.S.-like growth rate of 2 percent per year thereafter. We'll have whatever they're smoking.
"This is probably the last Greek bailout we will see, but not for the reasons the authorities are claiming," Perkins writes. "Neither the Greeks nor the EU will have the patience for another round of negotiations once this latest package unravels."