Eurogroup therapy for Greece

 Yesterday at about 5am, I think we had a breathtaking moment in world economics.

Let me first try to give you the best possible spin on Greece’s bailout. Greece awakes today with its debts at 121 per cent rather than 129 per cent. The bankers, often thought of as the main beneficiaries of these bailouts, well, they got burnt. At least three times, finance ministers broke up their deliberations to get the Greeks to squeeze more out of negotiations with the bankers. The end result: a net present value loss on their Greek loans of up to 74 per cent. So bankers silly enough to treat Greece as if it were Germany, have taken a short back and sides rather than a haircut. Yet everyone seems to be maintaining the notion that this will be accepted “voluntarily” and therefore will not qualify as a formal “default”.

Still, that did not get Greece’s debt levels as a proportion of GDP to the “magic” 120 per cent level which Europe has decided is “sustainable”. So the interest rate on the Greek bailout loans was lowered again (will Portugal and Ireland get the same deal?). Then much of the remaining legwork was achieved by the European Central Bank allowing the Eurozone’s central banks (Bank of Spain, the Banque de France etc) to realise a profit on the Greek loans they had been buying over the past two years to lower Greek bond rates. The “profit”, some €12 billion, will be distributed to member states and then given back to Greece, essentially, knocking 5.5 percentage points of Greece’s 2020 debt levels, and getting it down to 120.5 per cent.

Then the quid pro quo. Greece will have to accept making three months worth of billions of pounds of debt servicing interest payments in a separate segregated account to ensure repaying its debts comes before spending decisions of the Greek parliament. This will be passed as a law within two months (before an election) and then written into Greece’s constitution as soon as possible. More than that, the troika (the IMF, EU and ECB) will have a continuous presence in Athens to “help” Greece with keeping to the plan. So it sounds a lot like the “permanent Troika presence” that the Dutch finance minister told me about yesterday. But it is rather sugar coated.

The EC vice-president, Ollie Rehn, made a stark admission about Greece’s original bailout yesterday, when he told us at 6am: “We underestimated the challenges posed by weak administrative capacity and weak political unity in Greece.” The mea culpas also stretched to the IMF who talked of how this was a plan for “growth and competitiveness” as well as fiscal consolidation.

Apart from that, though, there are a ton of pitfalls arising from this deal, from Greek sovereignty to the remarkable leaked debt (un)sustainability study. More on that shortly.

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