Peace in Greece?

Mark Twain remarked that "the music of Wagner is not as bad as it sounds." Just so, the deal provided to Greece by the Euro Summit may not be as draconian as it first appears. Unpalatable yes; draconian no. In the period leading up to this Summit, Greece was looking for around 50 billion Euros. The Euro Summit makes provision for total financing needs of up to 86 billion Euros. Greece may be getting more money than it sought but under special conditions.

The most interesting area concerns privatisations. Greece has to agree to transfer the ownership of important State assets such as ports and electricity transmission networks to "an independent fund that will monetize the assets through privatisations and other means." The monetization of these assets will be one way that a new loan that will be provided by the European Stabilisation Mechanism (ESM) will be repaid.

Privatisations should generate a total of 50 billion Euros in sale proceeds. Of this amount, half or 25 billion Euros will be used for the repayment of the recapitalisation of Greece's banks. The amount of 12.5 billion Euros will be used for decreasing the Greek debt to GDP ratio (paying down Greek sovereign debt). The remaining 12.5 billion Euros will be used for new public investment. What this means is that three quarters of the privatisation money goes back into the Greek economy and only one quarter goes to the creditors. This is actually a pretty reasonable deal for Greece.

Greece has to agree to a lot of programs that Australians might call "micro-economic reform." These programs include changing regulations on Sunday trading; pharmacy ownerships, milk and bakeries. They also include deregulation of closed professions such as the marine staff engaged in ferry transportation. Other programs include the modernisation of collective bargaining, industrial action and implementing "the relevant EU directive and best practice, (on) collective dismissals."

On the other hand, the Euro Summit takes note of the urgent financing needs of Greece such as the 7 billion Euros on 20 July, plus an additional 5 billion Euros by mid-August. They note that the total envelope of a new ESM program would have to include a buffer of 10 billion to 25 billion Euros for the banking sector to support bank recapitalisation. They note that 10 billion Euros will have to be made immediately available in a segregated account for the ESM.

As a special sweetener, the Euro Summit announces that "to help support growth in job creation in Greece (in the next three to five years) the Commission will work closely with the Greek authorities to mobilise up to 35 billion Euros (under various EU programs) to fund investment and economic activity." This is considerable additional support to the Greek economy.

As to the longer term problems of restructuring Greece's debt, the Euro Summit notes that the Euro Group stands ready to consider possible additional measures on Greek debt such as possible longer grace and payment periods aimed at ensuring that gross financing remains at a sustainable level.

However, the Euro Summit "stresses that nominal haircuts on the debt cannot be undertaken." This last sentence restates the problem that we have been discussing since early this year. Without the forgiveness of substantial part of Greek's official debt, Greece's sovereign debt to GDP is so high that this debt cannot be sustained in the long term.

Conclusion

The Euro Summit has provided a set of solutions which may well support Greece through the next couple of years. The essential problem of the restructuring of Greek's official debt is still too politically difficult for the Euro Area and its institutions to address.

Until this problem is addressed, Greece will be a problem that explodes anew every two or three years.