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Greece deal leaves many questions
After all the hoopla over Greece in recent months, it’s weird that the agreement of a deal on Tuesday was not met with more celebration. It certainly came as a surprise to most analysts that a deal was struck (it’s amazing how fast agreement can be found when Greece capitulates and signs up to everything immediately).
Surely a comprehensive, multi-year bailout for Greece that means that Athens will stop hogging all the headlines is cause for cheer? Not so fast. There are a bunch of questions that still remain unanswered with this bailout.
The main question in my mind is what Germany and the IMF think about the deal. Both players remain ominously quiet on the agreement. Germany has reportedly voiced some concerns about pushing a bailout deal through parliaments too hastily without thinking it all through. While Germany would prefer to have a deal all sorted out by August 20th deadline (when Greece has a big repayment to the ECB…if you feel like this is deja-vu from last month, it is!), Berlin is happy to agree a bridging loan to get Greece through the month and give the creditors more time to deliberate over a more comprehensive bailout package.
If Germany has expressed some concerns, the IMF has been completely silent. This is worrying. One of the concessions Greece apparently “won” was that it will have to achieve a smaller primary surplus over the next few years (-0.25% of GDP in 2015, 0.5% in 2016, 1.75% in 2017 and 3.5% in 2018). This will surely have implications for Greece’s debt sustainability, but nowhere in the bailout details that have been leaked is there any discussion of debt relief. The IMF will surely take issue with this. If the IMF cannot get on board with this bailout deal, Germany certainly won’t. Merkel is adamant that the IMF be involved to give her government political cover. A smaller role for the IMF in a third bailout for Greece will significantly increase the number of “no” votes in the Bundestag, and Merkel is looking to run for another term in office.
The bailout deal is also light on details about the banks. Reportedly 10 billion euros will be injected into the banks up front before a comprehensive assessment can be completed by end-October. But so far the creditors have just pledged to sort out the 95 billion in NPLs at Greek banks, with no agreement on exactly how this will be done. The working assumption is that a bad bank will be established, but there is some opposition to this (mostly on the basis that it would be costly).
The privatization fund that will in theory generate 50 billionn in revenues also remains fuzzy. It is unclear when exactly this fund will be established, and I doubt it will be able to generate the target revenues given that there will be a complete fire sale of Greek assets.
Finally, a big question mark remains over Greek political stability. If there are no further defections over the next few days as the Greek parliament votes through 35 prior actions (and paves the way for other national parliaments to vote on the third bailout), then the government may remain in power through the beginning of the bailout. A snap election could well be called at the extraordinary Syriza party conference, however. Prime minister Tsipras is incentivized to capitalize on his current popularity and hold elections as soon as possible, before the government has to shove through more unpopular austerity measures as part of the third bailout.
I think this third bailout will pass through all the requisite parliaments, but I expect Greece to fall behind on a number of its targets fairly quickly. We can hope for Greece to move onto the backburner in August—but I reckon it will be back in the spotlight shortly thereafter.
*Megan Greene is the chief economist at Manulife and John Hancock Asset Management. You can follow her on Twitter: @economistmeg
The only agreement I see is a determination to fight this pseudo-agreement tooth and nail. Passing it through Parliament means absolutely nothing.
Syriza has no capacity to implement a new MoU. The very suggestion that Tsipras can call an election, win it and then run an austerity implementing government ignores the key lack of personnel to staff it. Once the Left Platform departs and the anti-austerity members shy away from posts the only people left will be those who cannot (rather than do not) want to meet targets.