Published in Business Spectator (Melbourne), 20 August 2015
As the third Greek bailout package is currently being debated in eurozone parliaments, it is already becoming clear that it will not be sufficient.
On Tuesday, the day before the Bundestag’s vote, two German broadsheets highlighted some of the uncertainties around the package.
The Frankfurter Allgemeine Zeitung questioned the assumptions concerning the recapitalisation of Greece’s banks, for which €25 billion is allocated. Meanwhile, Süddeutsche Zeitung reported that the €86bn package was €6.2bn short because some asset sales, which were meant to fill a €50bn privatisation fund, had already been booked into the bailout package itself.
Though these billion-euro details are undoubtedly interesting, they are not even the most important concerns. There are much greater uncertainties around the Greek package – not least whether it will work at all.
You do not have to be a cynic to be sceptical about the new Greek deal. After all, it is the third program of its kind. The previous two packages were meant to achieve precisely what this new plan is about: structural reforms of the Greek economy, budget consolidation, and asset sales. Besides, each previous package was meant to be the last. Only a few months ago, leading eurozone politicians categorically refused to even contemplate a third package.
We also know from experience that the assumptions behind the privatisation agenda turned out to be too optimistic. Already in 2010, sales of state-owned assets were meant to yield €50bn of which only a fraction materialised. With the new privatisation target, it is unlikely to be any different.
A few weeks ago, for example, it was reported that Austrian Federal Railways ÖBB (itself a state-owned company) considered taking over its Greek counterpart TrainOSE. However, as the Austrians immediately clarified, they would of course not consider paying a positive price because TrainOSE was a restructuring case. Little wonder: only 17 percent of all Greek rail lines are electrified.
The asset sales agenda is just wishful thinking, and realistically no-one would take the sales target seriously. The only reason it became part of the deal was window-dressing. It was meant to make the whole package look less onerous for the creditors and tougher for the Greeks.
The next problem with the third bailout package concerns the role of the International Monetary Fund, especially since the German government had long made the participation of the IMF a condition of its own contribution. This way, so the Germans hoped, more pressure could be put on Greece to actually consolidate its budget and reform its economy.
After five years of its involvement in Greece, the IMF’s appetite to continue its role is greatly reduced. This is only too understandable since the Fund had to bend its own rules in order to turn Greece into its largest-ever project, much to the dismay of the IMF’s non-European members.
This is why at this stage there is no guarantee that the IMF will sign up to the third bailout package at all. For the German government, this presents a massive credibility problem. Chancellor Merkel had always used the IMF as a signal to her bailout-sceptical colleagues that strict conditions would be imposed on Greece. If the IMF walked away, this would only demonstrate the failure of her previous strategy.
On the other hand, if the IMF stays on board this does not necessarily make it any easier for Merkel’s government either. Over the past months, the IMF has repeatedly called for debt restructuring and debt relief for Greece. This was obviously a self-interested demand since the IMF expects the likelihood of seeing back its loans to Greece improved if Greece partially defaults to its other creditors. That said, the IMF has a point: Greece’s public debt load of 180 per cent of GDP is too large to expect full repayment.
To keep the IMF involved in Greece, some kind of debt relief will need to be agreed upon. That, however, is precisely what Merkel has always ruled out. Merkel’s fiction remains that Greece has only been given loans that it will duly repay.
For Merkel, it is a catch-22 situation. If the IMF departs, it damages her credibility. If it stays, it will do so as well. In either case, at the moment it is way too early to assess the third bailout package properly without knowing the IMF’s decision.
Finally, there is another factor of uncertainty that hangs like a sword of Damocles over the third bailout package: Greece’s growth rate.
The political uncertainty of the past six months and the capital controls that were introduced in late June have hit the economy hard. Last week, Reuters reported that EU sources now expect an economic contraction of 2.3 per cent for this year and another 1.3 per cent in 2016. On these figures, it is plausible to expect the bailout package will turn out to be insufficient.
That is the crux of the matter. None of the measures will work if Greece does not manage to get its economy to grow again. Without growth, Greece will not be able to reduce its horrendous unemployment figures or reduce its debt burden.
Unfortunately, the major obstacle to creating meaningful growth remains Greece’s membership of the eurozone. This is why a temporary Grexit, as suggested by German finance minister Wolfgang Schäuble during July’s crisis talks, would have been a sensible option.
Instead, with the third bailout package, Greece is just getting more of the same medicine that has not produced the desired effects over the past five years. It will try to fight debt with more debt. It will keep the illusion alive that Greece can repay its creditors. The worst aspect, however, is that it condemns the Greeks to try to regain their competitiveness within the eurozone when this task would have been much easier outside it.
In all likelihood, this new bailout package for Greece will not be the last. In 2018 at the latest (if the funds even last that long, that is) we will be back to where we are now, and have the same discussions about Greece’s future — and about a fourth and final bailout package.
