Marathon not over

The Greek deal, hammered out in a marathon overnight negotiating session, makes the best of bad job. Of course, it would have been better to have bitten the bullet earlier by restructuring Athens’ debt sooner. And, Greece is still unlikely to pull through without further economic and political shocks. But, the debt restructuring cum euro 130-billion bailout keeps the pressure on Athens and has, probably, defused a wider blow-up.

Greece, its private creditors and its official creditors are taking some pain. That’s appropriate. As a foolish borrower, Athens has to reform. As foolish lenders, private investors must suffer a haircut. This will be more severe than expected. The rest of the euro zone made an error in letting Greece into the single currency, turned a blind eye when the country originally got into trouble, and has a strong interest in making sure that contagion to other vulnerable countries is minimised. So, it is right to be lending Athens a lot more money on even more generous terms than previously pledged.

But, will the deal really get Greece’s debts down to 120 per cent of GDP by 2020? With the economy still shrinking and the people nearing the end of what they can tolerate, there is huge scepticism the country will keep to its side of the bargain. This is heightened by the fact that the lion’s share of the new bailout cash will be paid upfront.

Greece’s official creditors are alive to the danger that Athens will stop playing ball once it has received the money, especially, with an election looming in April. They are insisting on further reforms, for example, hacking back the public sector, before the first cash is disbursed. They are beefing up the task force that is helping Athens implement the changes as well as strengthening their monitoring of the programme. Greece has also had to agree to amend its constitution so that priority is given to servicing its debt. Finally, the leaders to the two main political parties have committed to stick to the deal after the election.

Athens could still wriggle out of this straitjacket, particularly, if it can secure a primary Budget surplus next year. Then, it will no longer need cash to run its normal operations. At that point, the government could conceivably say it was stopping interest payments on even the restructured debt.

On the other hand, if Greece really has reached a primary surplus, much of the hard work will have been done. The benefit of reneging on interest payments entirely would have to be weighed against the cost of provoking a massive row with its partners which would then lead it to be turfed out of the euro. An equally likely outcome is that there won’t be a complete breakdown of relations. The programme will just veer off track, the numbers won’t add up, there will be further acrimonious negotiations and the debts will be further restructured. In other words, more of the same.