There have already been many articles written dissecting the results of Monday night’s Eurozone summit. Early reactions to the summit were positive, but more recent reactions from the markets have been more muted. These more sober reactions by financial markets are not surprising, since this has been the trend all along in watching how markets respond to EU summits. The case for market pessimism, however, is based on more than the extant empirical trend. Thinking about the manner in which the results of the summit were made public indicates a number of problems which may scuttle the Greek program altogether.
In the first case, the public details are not the whole story. The solutions offered to Greece (in the form of lowered interest rates, lengthened maturities and a repatriation to Athens of ECB profits) are all on the basis of assessments of how Greece’s debt will change over time. This debts sustainability analysis was not released to the public. Instead, it was leaked to the Wall Street Journal and the Financial Times. This is nothing new, as these leaks also occurred earlier this year as the IMF was preparing its letter of intent. This is a pattern that needs to stop. The “troika” (comprised of the IMF, the ECB, and the EU) needs to be much more transparent about how it conducts its business. This is the only way to convince the market that they are taking appropriate steps and insure its buy-in.
In addition to the sin of omission regarding the debt sustainability analysis, the discussion of the debt buy-back, which accounts for reducing Greece’s debt by 11% of GDP in 2020, is at best opaque. Early reports suggested that Greece was responsible for the money purchasing the debt on its own, but it now looks that the Eurozone is lending Greece the money. Greece needs the debt buy-back to be hugely successful not only to position itself moving forward, but also to unlock the rest of the troika funding from the IMF. Much of the backstory to these negotiations has been the public spat between the EU and the IMF concerning the appropriate level of Greek debt in future years, with the IMF insisting on 120% of GDP in 2020. While a debate over the appropriate level of debt eight years from now can seem trivial, the Fund has made the release of its share of the money for Greece contingent on a successful debt buy-back program. This means that the potential for more bickering between troika members should this buy-back fail. A squabble deferred, of course, is not a squabble resolved, and the lack of transparency about the debt buy-back is a bad sign.
Finally, there remains a profound unanswered question in this agreement: Can Greece Deliver? No one would dispute that Greece has made impressive efforts in reforms, but austerity is a political problem, not an economic one. Politicians have to vote for bills that cut spending and raise taxes, and these decisions are not made lightly. Greece has already been through two elections this year, and there are absolute limits to how hard international lenders can push a coalition government in a country with 25% unemployment. The expectations for Greece, then, are based on heroism rather than realism. For 2014-2016, the target for Greece’s primary surplus (which is government revenues minus spending) is 4.5% of GDP. Germany, the hallmark of fiscal rectitude in the Eurozone, has only gotten close to this primary surplus level once since 1991. Our inability to tailor economic adjustment to the political constraints that governments face means that we’re certain to face more political infighting within Greece, and more controversy as it is unable to deliver on its promises, not because it won’t, but because it can’t.
It’s ironic that the same international organizations that preach transparency fail to practice it, but the reasons behind this opacity are not difficult to understand. Just as poker players bluff to win a pot, summit documents such as these are constructed to create the appearance of consensus where one might not exist. This consensus may well unravel in the weeks to come, and we’ve already seen where the potential fault lines are going to emerge.