After much falderal, European finance ministers have agreed on another Greek bailout; but the $172 billion deal is not what it seems.
The terms of the bailout are not likely to be met. Greece is expected to reduce its debt-to-GDP ratio to 120.5% by 2020 (it’s currently over 160%). For that to happen, the Greek economy would have to start growing its way out of its debt burden…immediately. The recession that has lasted for the past five years would have to abruptly end and the economy return to growth on a dime. But growth contracted -7% annually in the fourth quarter of last year, and the Greek economy has seen quarter after quarter of negative GDP. Imposing unrealistic provisions on the country isn’t going to change that.
The deal also means private bondholders will have to eat a loss. Greece will launch a bond-swap program for longer-dated securities at a lower rate that will force bondholders to take a 53.5% write-down on the value of their Greek government debt. And there is no point trying not to participate. Greece will pass legislation to enforce losses if necessary.
As much as this deal supposedly allows Greece to ‘avoid default’…that is really not the case. Greece is not ‘avoiding default’, it’s just managing it. If your bondholders are being forced to take a 53.5% haircut, you have not honored your debt obligation.
And as much as this is being called a Greek bailout…it’s really not. It’s a bailout for the foreign banks (like Germany and France) that hold Greek debt. The money isn’t actually going to Greece…it’s going directly to Greek creditors. All Greece gets is more time.
But according to the head of the Greek Commerce Confederation, the deal is “selling us time and hope at a very high price”.