There is no Greek deal

By Megan Greene

Why the risks of a Grexit are now higher than before this weekend's summit.

You saw the headlines Monday about a deal for Greece? Well, there is no deal. There are a series of punitive and humiliating diktats from creditors that Greece must legislate into law by Wednesday or take a “time-out” from the eurozone.

Once these creditor demands are met, then Greece will negotiate a new bailout deal. That deal will very likely certainly be a failure for both political and economic reasons. So while the immediate risk of a Grexit from the euro may be slightly lower following this weekend’s summit of European leaders in Brussels, it is materially higher in the long run.

Absent from the all-night negotiations this weekend was any real buy-in from either side of the table.

Creditors have waxed on for years about how it is necessary for Greece to assume “ownership of the program” in order for it to succeed. Never has this been more the case than now. Any deal agreed for Greece will involve a fiscal adjustment so swingeing that Greece is likely to be in recession for at least the next two years. It will be extremely difficult for the Greek people to accept such an adjustment after five years of economic depression. The medicine will be particularly bitter for Greeks to swallow given that the majority of people rejected such measures a week ago in a referendum. Wolfgang Münchau sums it up best when he asks: “Do you really think that an economic reform programme, for which a government has no political mandate, which has been explicitly rejected in a referendum, that has been forced through by sheer political blackmail, can conceivably work?”

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There is no real buy-in for a deal on the German side either. Finance Minister Wolfgang Schäuble went to the Eurogroup meeting of finance ministers this weekend with a proposal to give Greece a time-out. This proposal was kept in the Eurogroup conclusions — albeit in parentheses because not every country could support this approach. Even the language used, a timeout, is humiliating, as if Greece was a four-year old child that will be put on the naughty step for a few years if it does not behave. At the leaders meeting Sunday, Germany’s Angela Merkel and Tsipras concluded that a Greek exit from the eurozone was the only realistic option. This does not inspire confidence that the German Chancellor is committed to keeping the eurozone together.

Another consideration is the implosion of the Greek political scene the past few years. The center-right New Democracy and the socialist Pasok parties were obliterated in January elections, punished by voters for their involvement in the first and second bailouts. The Greek people gave Syriza a mandate to push back against austerity and stand up for Greek dignity.

In the past 48 hours, Prime Minister Tsipras has had to break every major election promise he made. The current government will struggle to survive this week, much less far into the future. It will almost certainly be unable to legislate the terms demanded by the creditors without support from the opposition parties. A coalition of national unity, led by Tsipras, is likely to emerge by the end of the week with new elections in the autumn. Political instability will get in the way of trying to push through what will be extremely unpopular and difficult measures.

Even if there were buy-in from Greece and the creditors for a deal and the Greek government manages to legislate the demanded reforms, it is hard to see how a government that came to power vowing to push back against austerity measures will do a better job at implementing them than previous governments that were more amenable.

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Beyond this general skepticism, I have two main concerns.

First, in order to hit its primary surplus targets, Greece must boost its tax revenues. Back in 2010, it was true that many Greeks evaded taxes and so there was the hope that the tax haul could be fairly easily increased by catching more Greeks in the net. After losing one-quarter of its economy over the past five years, however, Greece is so far along the Laffer curve that an increase in taxes will be counterproductive. The issue is no longer that Greeks won’t pay taxes; rather that they can’t pay them. Tax revenues are reported in a timely manner in Greece, so we will know fairly quickly if streamlining the VAT system and broadening the tax base has any positive effect on Greek tax revenues.

Second, part of the financing for a third bailout is set to come from a €50 billion fund financed by Greek asset sales. The European Stability Mechanism (ESM), the eurozone bailout fund, will recapitalize the banks if the financing isn’t in place on time, which it almost certainly won’t be. But still it is likely the privatization fund will not come up with the cash to pay back the ESM, and so the greek government in theory will have to. Privatization has been a notoriously thorny issue for the Greek government. There have been almost as many heads of the privatization fund as actual privatization deals over the past few years. Even if Greece manages to privatize all the assets earmarked for the fund, the revenues will likely come in below target given that there will be fire sales. 

The Greek government was badly outplayed in Brussels this weekend. Even if Greece avoids political collapse in the next week, legislates immediate measures and signs up to a third bailout with the creditors, it is unlikely that we will get too far before the third bailout goes the same way as all the others — off track. The tone and content of the negotiations over the weekend suggest it will only be a matter of months before we are back to sleepless summits in Brussels, but at that stage trust on both sides will probably be in even shorter supply than it is now.