The EU, IMF and ECB approved yesterday the second Greek recovery plan, estimated at 130 billion euros. The plan involves reducing Greece's debt/GDP ratio from 160% to 120% between now and 2020, which is considered a more manageable feat than earlier proposals. At this point the Greek economy could start to spin.
Really? This time, the design of the bailout is more reasonable. Interest rates have dropped substantially, and there is a greater emphasis on the importance of reforms that bring growth. Further, moneylenders are monitoring the progress of adjustments and the adoption of new regulations. Just in case, money will flow through an account whose funds can only go toward paying down Greece's debt, something that should be reflected in the country's constitution.
Still, Greece's road to recovery will be rough and riddled with obstacles.
About the time that the new bailout was agreed upon, an internal report from the Troika appeared, explaining a possible scenario in which the bailout plan would fail and Greece's debt/GDP ratio would remain at 160% after the bailout. The idea is that the country would decrease in value internally thanks to a package of reforms and cutbacks. Still, this cocktail could continue to put pressure on the Greek economy while debt continues to grow and, therefore, become a true Tourmalet that is impossible to scale. At the same time, the fragility of the ruling class could prevent important measures from being imposed as people grow tired of reforms and lose their positive outlook. This outlook could precipitate and explode, especially considering that the country has election in April and the two main parties continue to lose support in the polls.
On the other hand, the preferential conditions of official financiers make it extremely unlikely that investors will flock back to Greece. And a third of private creditors were not represented by the International Institute of Finance, the banking lobby that negotiated a deal through which private creditors paid only 75% of the actual value of the debt. Thus they receive 25% in insurance against their investment and steer clear of the possibility of an complete and uncontrolled bankruptcy. Still, others could resist, and that would require Greece to apply retroactive collective action clauses, which would be equivalent to an imposed default, would activate Credit Default Swaps and could create massive widespread losses.
In principle, this risk is increasingly expected and therefore manageable. It is also possible that not activating credit default swaps would create far worse results, because then all investors would think about is covering their credit default swaps and selling their sovereign debt assets in a violent wave of contagion that affect the rest of the peripheral countries. If sufficient firewalls are not erected or the rest of the periphery continues to stagnate, Europe has decided to double its wager on Greece and keep it on the euro in order to prevent contagion. With the latest bailout package, it is unclear if Greece can take advantage of their second opportunity to re-establish itself in the Eurozone.
This will be known as soon we can tell whether the second recovery is enough. A different issue is whether the Greeks can comply with measures mandated by the EU. For that, it is necessary that the EU relaxes the pace of adjustments in Greece and complements this bitter pill with funds that are allocated to investments. The strategy for restoring health to the Greek economy demands an increased focus on growth.
