I must admit to having tuned out the Greek debt crisis a bit. It’s not that the effective bankruptcy of Greece no longer has implications for the world economy — the country could still be forced from Europe’s monetary union, with potentially destabilizing consequences. Nor has the suffering of the Greek people diminished. Unemployment has soared over 25%, and with more budget cutting to come, the economic prospects for the Greeks are unlikely to brighten anytime soon. Yet the repetitive antics of the leaders of Europe in their endless negotiations over what to do with Greece can easily lull even the most curious into a stupor. For three years now, European policymakers have been bickering, procrastinating and denying the reality of what economists have been saying since the beginning: that Greece’s debt is unsustainable, the bailouts as structured would never bring the burden down to a more tolerable level and the only way to resolve the crisis is some serious debt relief.
That’s a step European leaders have been reluctant to take. It is true that earlier this year a swap of Greek bonds took a bite out of the country’s debt load by forcing a “haircut,” the cute word bankers use to describe losses, onto creditors. But that restructuring included only private bondholders, not official creditors. It became clear almost immediately that the relief offered to Greece wasn’t going deep enough. To get Greece’s government debt-to-GDP ratio to a more acceptable level, like 120% (from some 170% now), Europe’s leaders were going to have to reduce Greece’s debt burden even more, and that potentially meant having to take a haircut of their own. Doing so, however, was politically difficult. The two bailouts of Greece were unpopular with voters in the richer nations of Europe to begin with; taking losses on that aid would be even less popular. So the negotiations over the Greek bailout dragged on and on and on, with the debt can getting kicked down the road again and again.
So when I began reading on Tuesday morning about the latest agreement reached by European Union leaders, I expected my eyes to glaze over as usual. But instead, I got the news equivalent of a caffeine jolt. This time was different.
The reason is that Europe’s leaders have finally mustered the will to take a political risk. The framework of the deal, which you can read in this formal statement issued at the end of the latest conference, does make progress in helping Greece bring down its debt level by potentially inflicting losses onto official creditors. Europe’s finance ministers agreed to sharply lower the interest rate charged on some bailout loans, while other loans will see interest payments deferred. Meanwhile, the maturities on all the bailout loans will be extended. By making such concessions, European policymakers hope to shrink Greece’s debt burden to 124% of GDP by 2020 (a relaxation from the original 120%) and to 110% or lower by 2022. In all, the measures should reduce Greece’s debt by a hefty 20% of GDP. The governments also agreed to finally release a tranche of bailout funds to Greece that had been held up for weeks, which will allow Athens to keep itself afloat.
E.U. officials were beaming about the agreement, as they always do whenever they reach any kind of decision. But will the deal actually work? Is the Greek debt crisis finally under control?
Of course not. This is the euro zone, after all, and that means key details of the deal were left unspecified and the overall program still falls short of what is likely necessary.
The first problem concerns a proposed debt buyback scheme, in which the Greek government would purchase and retire bonds at a discount. The details of the plan were left undetermined, which means we don’t know how much debt will be involved in the end. Then there is the long-standing concern that the Greek government won’t fulfill its side of the bailout bargain. Politicians in Athens will have to show some serious guts to enforce the austerity measures demanded by its European creditors in the face of a crumbling economy and an angry populace. The austerity itself is part of the problem. The more Greece cuts, the more the economy sinks, making it harder to meet fiscal targets. Even more, early analysis of the agreement figures that European governments are going to have to take even further steps toward reducing Greece’s debt if they plan to meet the 2022 target. That likely means outright write-offs that would inflict heavier losses. Here’s the opinion of Société Générale analysts on the deal:
At this stage, we have yet to see the detailed numbers behind the new agreement, but are encouraged that the measures announced mark an additional step in the right direction. Our concern remains that this will not suffice to make Greek public finances sustainable and allow Greece to return to market financing in 2017. The potential for shortfalls on implementation of austerity and structural reform are one risk, but our real concern is economic growth … While this plan should buy time up to the German election in the autumn of 2013, we expect additional measures to help Greek debt sustainability will be required beyond this date … In our opinion, something more substantial will be required, with official sector debt forgiveness a very real, but politically challenging, possibility.
An encouraging sign, though, is that Europe’s policymakers seem to acknowledge that possibility. The usually austere German Finance Minister Wolfgang Schaeuble left the door open to more debt relief. “When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt,” he said, according to Reuters.
So even if this latest agreement is far from perfect, it is — amazingly — a positive sign. The veil of delusion that has hampered Europe’s willingness to tackle the Greek problem seems to be lifting, and the commitment to making potentially politically difficult decisions appears to be building. The Greek story might get a lot more interesting.