Greek debt report reinforces doubts on bail-out deal

It’s no surprise that the “disciplinary” elements of this week’s Greek bail-out deal have been badly received by many in Greece. Strengthening of the Commission Task Force in Athens to provide an “enhanced and permanent presence” to oversee Greek government measures, and deposit of quarterly debt repayment funds in an escrow account to ensure their availability are difficult for anyone to accept. It’s as bad as having the IMF dictate your economic policy!

But the European Financial Stability Facility must be ratified in the parliaments of 17 countries across the eurozone, so further oversight is inevitable to boost confidence in Greece’s ability to keep its side of the bargain, especially as the economic case for the whole exercise is beset by doubt.

Just as Eurogroup ministers were drawing up the conclusions of the February 21 Brussels meeting, Reuters news agency got hold of the EU’s Preliminary Debt Sustainability Analysis for Greece, circulated as a confidential background document on February 15, in advance of the Council. It makes fairly gloomy reading but provides a template against which actual outcomes for the next eight years can be judged.

For many commentators the analysis has proved that the whole project is condemned to fail, because Greece would never be able to achieve the targets specified in the Eurogroup agreement. Recession in the Greek economy has been deeper than expected, structural reforms are slow to come and debt reduction might be slower than anticipated. It is not an optimistic scenario.

Some factors such as the haircut on private debt seem already to improve on the assumptions of February 15. The Eurogroup has also agreed measures on interest rates and on ECB and national bank transfers which may be helpful. But there are so many other unknowns. The document calculates that a one per cent annual reduction in Greece’s economic growth would increase Greek debt to 143 per cent of GDP by 2020 compared with the 120 per cent Eurogroup target, whereas a one per cent higher growth rate would cut the debt to 116 per cent. The gloomiest prognosis would have Greek government debt at 160 per cent of GDP by 2020.

All these figures must seem purely academic to many people in Greece who are struggling to survive cuts in pensions, salaries and jobs, and increases in tax, but it is surely the case that only far-reaching social and structural reform and a surge in competitiveness and economic growth will save Greece from descent towards third world status. Some estimate that an actual devaluation, replacing the euro with the drachma, would cut wages by half.

The current year will see a further 4 per cent decline in the Greek economy. Then the “internal devaluation” identified by the Sustainability Analysis, with its squeeze on labour costs and the whole panoply of structural reforms, should be taking effect. The analysis charts a projection for economic growth of 2.3 per cent in 2014 and 2.9 per cent in 2015 (see the blog from Felix Salmon of Reuters, where he also discusses the pros and cons for journalists of publishing complete documents), but delays in achieving privatisations and other measures will further postpone a return to sustainable debt levels.

Commentators and markets have been generally sceptical about the February 21 deal, while accepting that it gives a breathing space for recovery of Europe’s economy and strengthening of banks’ and governments’ creditworthiness. In the end it will be Greece’s own efforts in transforming its economy which will determine whether this deal can work.

Michael