The Greek bailout drama: Is this time different?

Economists and analysts around the world, believing a Grexit almost inevitable just a month ago, now insist that the proposed deal between the Greek government and the creditors is only band aid for Greece’s economy and so, it will not work. Well, of course, after five years of depression, having the troika back in Athens to discuss a new package of what I call “reform austerity” is not the easiest thing in the world. However, this time it seems that preconditions for a viable solution are well in place. Let me explain why.

First, the Greeks have now understood that there are no easy or viable policy alternatives to a deal so any reactions to the agreement are expected to be rather mild. Voters do not recognize the last five months as a disaster for the economy and, instead, they seem to believe that Prime Minister Alexis Tsipras did the best he could to negotiate effectively with the creditors. So, if Tsipras cannot deliver something better for them, nobody can.

Second, the Europeans now understand that only Tsipras—a left leaning, highly popular prime minister—can not only pass the bills of the prospective agreement but more importantly guarantee implementation with minimum social unrest. Some commentators will caution that Tsipras openly expresses doubts about the political orientation of the agreement and questions the “social fairness” of it, but what do you expect a politician to tell voters? That he is enthusiastic about the program?

Third, the Europeans this time seem to be determined to use the “carrot and stick” method. The carrot is called “reforms for money” and “reform for some debt forgiveness, of any kind.” If the creditors play well, the program might deliver results this time. The stick is called “a temporary Grexit” and will be used to convince not only the government but also the domestic political system as a whole that it must comply with the rules of the prospective agreement.

Fourth, the Europeans seem now to agree on some kind of re-profiling of the Greek debt. This will serve as a victory for Tsipras in the eyes of domestic voters and protect his popularity. This is indispensable if the creditors want reforms to pass and, this time, to see them efficiently implemented in the real economy. The creditors now understand that the focus should be on the real implementation of reforms, most of which were very effectively described in the IMF 5th review from summer 2014, and which are still waiting to be applied in the real economy.    

Fifth, this time the external environment is much better than it was two or four years ago. Eurozone growth rates are steadily improving, the European Central Bank’s Quantitative Easing (QE) program continues to mutualize the eurozone’s debt (that will hopefully include Greek bonds) and French President Francois Hollande’s proposals last week regarding the urgent need for a “eurozone government” shows that European leaders now understand that the multiples deficits—institutional, democratic, and financial—of the euro have to be addressed this time immediately and substantially. Delays in effecting such changes will only favor the extreme political forces arguing not only for the dismantling of the eurozone, but for a breakup of the entire European Union project.

Last, but not least, as some analysts have already shown, Greece’s debt is not as much of a burden for its economy as some have suggested (you can read my take on it in a previous blog). The European System of Accounts (ESA)—the system of national accounts and regional accounts used by members of the EU—give “a solid legal basis” for debt rescheduling. Together with the International Public Sector Accounting Standards (IPSAS)—the public sector version of International Financial Reporting Standards used by companies—they could give the Greek government the advantage of producing audited financial statements. As they specify that the debt is to be valued at the time of transaction using comparable market values under commercial considerations, both the ESA and IPSAS rules, if and when applied to Greek debt, might help to show the restructured debt number on its balance sheet, which will be lower than the original face value (Kazarian 2015).[1]

These detailed accounting rules might allow Greece to show the new lower debt value on its balance sheet in order to have a renewed opportunity to grow and prosper. And this is exactly what Greece needs right now: a fresh start. So, debt restructuring/re-profiling might not be such a difficult task since the official tools are there and Greek government liabilities are already in much better shape in Net Present Values terms than most of the people realize.

This is a big deal not only for the amount of debt the market perceives as existing. It will strengthen the view that Greece has a genuine chance to attract foreign investment, upgrade the value of its national assets, get more money from privatizations, increase the value of collateral holdings by the banks, create more jobs and income and, thus, at last recover strongly. With Greece and the troika back at the negotiating table, this time could well be different.

[1] P. Kazarian, Greece Sovereign Debt: Asking the Right Questions. Lecture given at CESifo, Munich, 9 July 2015.