Even by the standards of the sovereign-debt crisis, the provisional agreement reached yesterday by euro-area finance ministers and the International Monetary Fund (IMF) on a second Greek rescue package looks like a messy fudge. It is clear that Greece’s euro-area partners are determined to avoid a near-term euro-area exit, but a long-term solution will require a much more effective growth strategy.
The good news is that the latest deal should allow for the release of €34.4 billion of funding by the end of the year (€ 10.6 billion in state financing and €23.8 billion for bank recapitalisation), with a further €9.3 billion in the first quarter of 2013, subject to Greece meeting various performance criteria. This should help reduce the risk of a near-term Greek default or euro-area exit.
But the credibility of the programme ultimately depends on the underlying debt-sustainability analysis. The latest plan is to reduce Greek government debt to 124% of gross domestic product (GDP) by 2020 and “substantially” below 110% by 2022.
To this end, euro-area governments are willing to provide funds for Greece to conduct a bond-buyback operation. They will also “consider” cutting the interest rate on loans extended under the first Greek Loan Facility and channelling all profits from the European Central Bank’s bond-purchase programme back to Greece. In addition, the maturity of all official loans to Greece will be extended by 15 years and interest payments on loans provided under the second programme by the official bailout fund, the European Financial Stability Facility, will be deferred for 10 years.
The quid pro quo for the IMF’s acquiescence in the latest deal is a commitment from governments to consider additional measures to keep the debt trajectory on track should that prove necessary and so long as Greece remains compliant with the terms of the new programme. However, the IMF will not sign off on this until it has seen the (uncertain) results of the bond-buyback operation.
In the near term, the buyback operation assumes central importance. Even though this needs to be completed by December 12, the details are still being worked on. If the buyback is successful, then (subject to parliamentary approval in a number of countries) euro-area governments and the IMF should be able to formally approve the new programme on December 13. If the buyback fails, there will be a gap in the new programme and policymakers will have to go back to the drawing board.
Despite this residual uncertainty, it seems clear that other euro-area governments are willing to offer additional financial assistance to Greece—if it delivers on its reform commitments. Moreover, the terms of that support are becoming clearer and could serve as a template for other countries.
In the first instance, there is a gradual extension of official loans to ultra-long maturities at heavily subsidized interest rates. But, if this is not sufficient—as may well be the case in Greece—write-offs of principal and accrued interest on official loans will then become necessary. Recent comments from policymakers suggest that this type of gradual debt-forgiveness could be conducted in a phased way as a “reward” for progress in Greece. Unfortunately, all of this will matter for naught if policymakers cannot stop the Greek economy from imploding.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein.