The arrangement for Athens is a 10-year gamble on a brighter future
The plan for Greece may strengthen the Government’s argument as it pursues an elusive debt relief deal.
Although several big hurdles remain, the prolongation of international support for the Greeks suggests the EU powers are amenable to the kind of long-term aid the Irish want. A doubling of Greek rescue loan maturities to 30 years puts the country on a path into the 2040s.
This inherently frail agreement is designed to postpone the evil day. Greece stands to receive €43.7 billion between now and the end of March 2013, but recession is already in its fifth year and another €13.5 billion in fiscal retrenchment is still to come.
In a volatile political and economic panorama, the arrangement is predicated on the achievement of stability a decade hence. In a fragile country, it assumes everything will come right after 10 more years of rectitude. What is more, the vexed question of loan writedowns from government and other official lenders is kicked down the road for reckoning later.
Radical
But Europe and the International Monetary Fund are still bending over backwards to keep Greece in the euro. Even though Minister for Finance Michael Noonan insists there is no direct crossover to Ireland, Greece’s global backers have again chosen to avert the nuclear option of an uncontrolled default. Escalating hardship in Greek society and rising support for radical anti-bailout parties of the left and right show the plan is prey to many risks. But the EU powers continue to play it (relatively) safe.
Inevitably, the question arises as to whether they take the “safe” option for Ireland. Despite the agonising lack of a breakthrough thus far, the Greek example suggests they might just provide some leeway in the end.
A debt deal will probably be required to secure Ireland’s return to private debt markets next year. Dublin’s argument must be that this is preferable to bridging loans or a second bailout.
There is no certainty whatever. But Germany’s recognition that Ireland is a “special” case illustrates that some kind of an arrangement remains in play. Noonan always said a pre-budget deal on the Anglo Irish Bank promissory note scheme would suit him. While the lack of any deal with the European Central Bank makes that task more onerous still, the reality is that the next €3 billion does not fall due until March.
One of the prime difficulties is the ECB’s ingrained institutional resistance to anything other than expensive short-term support for the former Anglo. This is crucial, for some of the plans mooted by Dublin would necessitate a pledge of long-term ECB support at rock-bottom rates.
Where the ECB dares not tread, the euro zone finance ministers have. True, the ECB operates under a separate and highly restrictive mandate. But the Greek deal done in the early hours yesterday received unambiguous approval from ECB chief Mario Draghi. Not only has the interest rate on the country’s loans been scaled back, but a 10-year deferral of interest payments will save a cumulative €44 billion. Greece will buy its own debt from market investors below its face value. Euro zone countries will also forego their profit on the Greek bonds held by national central banks.
Europe and the IMF say all of this will bring the Greek national debt to 124 per cent of economic output in 2020. This remains well above the “sustainable” rate of 120 per cent the IMF was seeking. However, ministers and IMF chief Christine Lagarde resolved that separate unspecified measures will be taken later to bring the debt ratio “substantially below” 110 per cent by 2022 if Greece does all it is supposed to do.
This is where the question of a euro zone “haircuts” on Greek debt comes into view again. Absent an unlikely increase in Greek economic growth, it seems the only way for the country to achieve that is for its partners to make direct fiscal transfers or write down their loans. No one dares tackle that before the German election next year.
With Greece’s fate in the balance, it falls to Noonan to turn this to his advantage.
