New Debt Deal Has Not Knocked ‘Grexit’ off the Table
Greece may have avoided crashing out of the euro for now by agreeing to creditors’ demands for sweeping reforms in return for cash, but economists are split on whether the deal is good for either party or even if ‘Grexit’ is off the table.
Greek Prime Minister Alexis Tsipras, in a U-turn from his leftist policies, bowed to lenders on Monday and agreed to enact crushing reforms, raise taxes, deepen austerity and sell public assets while surrendering sovereignty to outside supervision.
In exchange, Athens’ German-led creditors agreed to fund it to keep its banks and economy afloat while talks resume for a third bailout estimated at 86 billion euros.
But the size of the cutbacks, lofty privatization targets and stipulation that Athens must keep lenders informed even for public policy matters stunned financial markets and Tsipras’ Syriza party, which won power promising to end austerity.
A Reuters poll of nearly 60 economists conducted in the 24 hours after news of the agreement broke showed they were skeptical whether the deal was good for both Greece and Europe.
“For Greece it’s the only deal sovereignty– with a gun to their head they have to accept. For the rest of the euro zone it’s the only thinkable solution,” said Christian Lips, economist at NordLB.
Greece needs 7 billion euros by July 20 to pay the ECB and 12 billion euros by mid-August when another ECB payment falls due. Its banking system has remained shut since last week and is teetering on the verge of collapse.
The latest agreement requires the Greek parliament to ratify the whole package by Wednesday and pass legislation to increase taxes, cut pensions and set aside 50 billion euros of public sector assets for sale under foreign supervision.
The problem is Greece may not have enough to sell.
A two-thirds majority in the poll, 35 of 53 economists, said Greece does not have assets worth 50 billion euros that it could feasibly privatize.
That amount is roughly a fifth of the economy and a previous attempt to raise half that much ended poorly when Athens managed to sell just a fraction of what was forecast.
“Fifty billion is very optimistic,” said Nick Stamenkovic, economist at RIA Capital Markets.
Another asked: “What are they going to do, sell Crete?”
The deal, finalized early on Monday after all-night talks, also does very little to ease Greece’s massive debt pile, which is nearly two times the size of its economy and was one of the main points on which negotiations had stalled last month.
Under the new agreement, some sort of restructuring by way of extended maturities or lower interest rates could be considered only if Greece convinces its European partners that it is serious about implementing all agreed reforms.
An overwhelming majority of economists in the poll, 54 of 58, said Greece needed some form of debt relief for its fiscal position and economy to be sustainable.
“It doesn’t solve at all Greece’s fundamental problem of unsustainably high debt,” said Jonathan Loynes, chief European economist at Capital Economics, of the deal agreed.
“So I think it will quickly become clear that Greece still needs to leave the euro zone in order to undergo a bigger debt writedown and to improve its competitiveness.”
Loynes is one of only nine economists polled who are still forecasting at least a 50 percent chance Greece leaves the euro.
The wider consensus for the likelihood of ‘Grexit’ has dropped to 30 percent, significantly lower than last week’s 55 percent, which was the highest median probability in years of Reuters polls asking the same question.
Still, the risk is only back to where it was in mid-June.
Perhaps another reason for the still-high probability of ‘Grexit’ was the inclusion of a “time-out” in the Eurogroup document prepared just before final negotiations resumed that meant Greece could step out of the euro temporarily.
While Germany eventually dropped a proposal that many said resembled a forced ejection, its mention in an official document chips away at the concept of a united European Monetary Union, membership of which has so far been considered irreversible.
A slight majority of economists in the poll said making a temporary exit from the euro zone a possibility had put the currency union at serious risk.
“The revelation a country can not only leave the euro zone but possibly leave it for a period, undergo a debt restructuring and a currency devaluation and then go back in again, I think potentially has moral hazard risks attached to it,” added Capital Economics’ Loynes.
“Other countries might now know that is an option if they hold out negotiations.”
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