Greek Debt deal reached – a “haircut” in all but name

So, it seems that the Greek Government can now take a deep breath as the so called Troika (its creditors) finally reached an agreement and unlocked the long-delayed and much awaited loan payments issue that had been hanging over the country for weeks.

Greece will receive a total of €44 billion, spread over four installments, as long as the country sticks to the bailout clauses and which is the same as saying – stick to the austerity measures!

It was the influence of the IMF who argued that Greece didn’t only require the necessary funds for to pay the next debt tranches but actually needed a surplus simply to survive that, in large part, pushed the deal through. However, no other Sovereign was much willing to negotiate anything much different from the current austerity package and, importantly, was unwilling to sanction a haircut.

Christine Laggard – the IMF’s head, has been seeking a Greek debt haircut for some time now, seeing it as the only means for the country to reduce debt burden to something near the required limit of 120% of GDP. It seems however, that Lagarde’s stick is not big enough when waved in the face of Ms Merkel who, sadly for the Greek people, has a General Election to win next year and her head would be on dead-or-alive reward posters if she was seen to support such measures let alone give Greece another cent from German taxpayers…

Northern countries prohibited the use of the word haircut and negotiations ended with the same old same old – a Greek loan to be paid, further austerity measures to be implemented and an unsustainable situation kicked, once more down the road down the road.

Greece will now have to reach a target debt-to-GDP ratio of 124% or less in 2020 instead of the first 120% goal. With so much time to pass between now and then and General Elections to come, this change has no practical effect whatsoever in our opinion. What is a 4% change in the ratio in eight years time, after all?

The Troika of creditors did decide however to cut the interest rates on its loans to Greece and to delay interest payments for 10 years (so perhaps a haircut in all but name). Besides that, the ECB agreed to return any profits related to its holding of Greek bonds to Greece (it certainly isn’t that much!) and Greece will buy back its previously issued bonds (at much depressed prices). Finally, loan principal repayments will start in 15 years.

The approved measures will certainly help Greece but probably only for a few months until the country reaches another break point and further “discussions” are once more hastily convened until everyone realizes that a country in a five year recession with a GDP loss that is almost the same as the Great Depression period between 1929-33, will quite simply not be able to repay the current debt it carries. A proper debt forgiveness program and ejection from the Euro will probably prove much wiser than simply throwing more money a and effectively bankrupted nation presently bereft of hope. Until next years’ German General Election there is no hope for change in her stance. After that, who knows..?

Filipe R Costa & Editor