COMMENTARY The $170 billion Greek bailout deal announced today was as surprising as snow melting in June and will have about the same impact.
The deal means Athens will get the money before March 20 and be able to make the next round of payments on its debt and keep what remains of its government open. It does not mean Greece can afford to pay its bills, so expect another round of all this when the next round of payments falls due.
There was never any real doubt Greece would get the money. The EU finance ministers were never willing to risk the likely financial meltdown if the nation went into default. Even so they had a devil of a time getting the details to their liking. Here are some key points:
- Bondholders will be forced to take a 53.5 "voluntary" cut on repayment.
- A permanent team of foreign monitors will be in place to ensure Athens lives up to the terms of the deal and to render the idea of an elected government meaningless.
- Official lenders will cut interest rates on bail-out loans to Greece by 0.5 percent over the next five years and 1.5 percent points after that.
- EU member central banks, which hold $15.8 billion in Greek bonds, will contribute all income generated from those bonds to Greece through the end of the decade.
If all this works as planned, the net result will be getting Greek debt down to a very unsustainable 120 percent of GDP by 2020. Without the plan the debt is projected to be a very, very unsustainable 164 percent of GDP that year. The new deal is already off track. Its projections are based on a mythical Greek economy that isn't contracting at a rate of 7 percent a year.
Despite this, chair of the EU finance ministers' group, Jean-Claude Juncker, said "The new program provides a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing."
Italian Prime Minister Mario Monti was considerably less enthusiastic, "The deal is a good result for Greece, the euro zone and for the markets, we hope."
The EU is fully aware that this deal could unravel within a month. The Financial Times reports
A "strictly confidential" report on Greece's debt projections prepared for eurozone finance ministers reveals Athens' rescue programme is way off track and suggests the Greek government may need another bail-out once a second rescue - set to be agreed on Monday night - runs out.
Even the current deal is far from assured. That depends on 100 percent acceptance by private sector holders of some $264 billion in Greek debt.
What we have here is the latest round of Olympic Kick The Can Down The Road And Hope It Doesn't Explode.