Despite bailout outline, creditor divisions renew the risk of a Grexit
Despite a temporary agreement on July 13th between Greece and the Troika, new divisions for a lasting deal amongst creditors present another risk for Grexit.
After seven months of uncertainty Greece and its creditors are close to reaching a preliminary deal this week on the nation’s €86 billion rescue program, amid growing German isolation over its tough stance towards Athens. Today, Tuesday, negotiators announced that the framework of a deal had been agreed.
Significant concessions by Greek Prime Minister Alexis Tsipras and his team have prompted other hawkish Eurozone members such as Finland to break with Germany, which wants to buy more time to get more concessions. Even previously sceptical EU diplomats now a say that a full agreement could be reached by the August 20th deadline, when Athens must make a €3.2 billion debt repayment to the European Central Bank.
The main elements of the proposed deal include spending cuts, administrative reforms and privatizations. However, Athens and its creditors still disagree on details of a €50 billion privatization plan and proposals for raising the planned budget surplus, excluding debt interest, to 3.5 of GDP in 2018 from zero this year. Furthermore, officials in Brussels have said that a €5 billion bridging loan to give negotiators more time, and championed by Berlin, was still on the table.
Compared to last month’s Eurozone summit, when Greece came close to leaving the Eurozone, these recent developments offer a reason to be cautiously optimistic about the prospect of a deal.
There is some context to support such optimism. Specifically, there are past instances where Eurozone leaders managed to isolate German officials on certain issues, albeit with limited success. For instance, in June 2012 the then Spanish and Italian Prime Ministers, Mariano Rajoy and Mario Monti respectively, threatened to block the Eurogroup meeting, unless an agreement prescribed direct recapitalization of Spanish and Italian Banks. The result of Spain and Italy’s interventions was the Eurozone’s banking regulator, the Single Supervisory Mechanism.
However, besides the limited achievements of such interventions, divisions within Greek politics and among Greece’s creditors are so stark, that they lmay bring down any eventual deal and Greece back to the verge of Grexit.
Within Greece, implementation of bailout measures is proving extremely difficult, with the intransigence of Syriza MPs forcing the Greek government to rely on pro-European opposition parties to pass reforms through parliament.
On the other hand, Greek creditors may find it increasingly hard to coordinate with each other following the IMF’s recent announcement on Greece’s unsustainable debt level. The IMF’s move has signalled to Berlin and Brussels, that it will not participate in any new bailout without provisions for a debt restructuring.
Christine Lagarde, the fund’s Managing Director, came under intense criticism from her own staff three times in a month, after they disavowed her for her decision to provide more loans as part of the third bailout deal that Eurozone leaders signed on July 13th. According to the IMF’s own rules, financial assistance cannot be provided to countries with an unsustainable debt.
Given the IMF’s withdrawl from negotiations without debt restructuring and Germany’s stern opposition to any debt restructuring, a default followed by a Grexit may occur since German MP’s will simply not vote for a new bailout without IMF participation. Political risk never really evaporated after the signing of the July 13 agreement. It has simply spread from Greece to its creditors in the North.
Given Germany’s stern opposition to any debt structuring for Greece and the IMF’s withdrawl from negotiations without it, more political brinkmanship and talk of default is likely to occur. Any progress made from the July 13th agreement may evaporate – this time in the hands of Greece’s creditors.
