Second Greek bailout – another perverse short term fix

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For several months now we have all been witnesses of the political shadow play between the Greek government and its trio of lenders (EU,ECB,IMF). Anyone aware of the circumstances was already convinced that a new bailout to Greece would eventually be agreed upon, given that all parties had no better alternative. At the same time we all knew that European politics would still have to respect its gradualist character, i.e. the small, cowardly steps towards the truth. This has after all been the history of the “Greek” and broader crisis – a story of prior denial of everything that was rational, as it was deemed “politically impossible”; only to be embraced as inevitable when the damage was done and the cost was higher.

A bailout was considered unacceptable in the first place, yet we have seen massive bailouts over the last years and there is much evidence suggesting that we might well have more in the near future. So was the idea of restructuring the public debt of Greece or of offering loans with low interest rates, in order to keep the debt dynamics in check. Time and again EU politics have not been able to get rid of their chronic sclerosis and self-defeating austere conservatism. They undoubtedly failed to do so again with this second package to Greece worth €130 billion.

The new bailout has violated all the initial “no” of the troika, but has done so in a manner that further perplexes things instead of offering a way out of this smoldering mess. The conditions that were set as prerequisites to the new programme are so complex that may in the end allow the shrewd (speculators) to abuse the loopholes that exist, thus canceling all efforts to make the debt sustainable in a way that does not harm other member-states.

The numbers of the new bailout simply do not add up. One has to resort to fantasy and unrealistic assumptions about the actual situation and the way the economy functions, in order to conclude that this latest package will be a long-term solution to the Greek facet of the systemic crisis. To be precise, it is wildly optimistic, if not utopian to believe that Greece will run primary surpluses for almost a decade only to reduce its debt level to some 120.5% of GDP by 2020 – note that this is the most optimistic figure, yet it still is an unsustainable debt ratio. For that to happen there must first be some magic fairy that will contribute to robust economic growth for several years in a row, in an economy that still suffers from the internal and external malignancies that brought it in this position. In addition the monolithic austerity regime must ultimately lead to recovery, even though it is crystal-clear that it has so far made the real economy even less competitive, because of higher taxes, increased political uncertainty and critical banking stress. In other words austerity, which deals only with the symptoms rather than the causes, must somehow fix all the structural flaws of a collapsing edifice, ironically by putting more pressure on it, thus accelerating its destruction.

Policy-makers have clearly been elaborating under false assumptions or dangerous delusions. Characteristic is the process of the restructuring of the public debt of Greece. The so-called PSI (private sector involvement) programme whose purpose was to impose loses on the sovereign bonds held by private creditors, had as a precondition the notion of voluntarism, in order to avoid an anticipated “calamitous” activation of the CDS contracts resulting from a coercive debt restructuring that would surely classify as a credit event. This practically deprived Greece of its sovereign right to proceed with a coercive debt restructuring. Having lost its bargaining power, Greece could not push for a deal that would likely ensure the sustainability of its debt.

This offered the opportunity, though it never had such intention, to hedge funds to step into the play, by buying up large quantities of Greek sovereign bonds, with the purpose of exerting magnificent pressure on Greece for more profits on their side. Indeed only a small percentage of the banks that are supposedly involved in the restructuring deal, do actually participate, since most of them have been replaced by hedge funds who will make profit out of this either by blackmailing Greece into accepting odious conditions or by gripping on to their CDS contracts, which will yield them exorbitant profits in case of a credit event. Regardless of what might be the end to this story, its impact both on Greece and the future borrowing prospects of countries mired in crisis will be significant, since it will make things much more difficult and complex than they ought to be.

The perverse effects of the new package can also be seen on the creditor status. In the bond swap that leads to a “voluntarily” writedown (the PSI programme), the ECB and the Eurosystem were exempted. Though it might sound reasonable not to impose loses on central banks or other official creditors, in truth it is not. By giving a preferential status to the ECB and the Eurosystem, policy makers have created two classes of creditors, while they have also killed off the market’s checks and balances, by greatly reducing the effectiveness of the CDS.

With the bad precedent of the Greek debt restructuring, the crucial question that is raised, is who will from now on invest in eurozone sovereign bonds, when he/she will either be forced to give seniority status to the ECB or other institutions and when he/she cannot effectively hedge the investment with the acquisition of CDS contracts in parallel? Three are the most likely answers:

  1. no serious investor will do that, thus expect increased difficulty in accessing the markets for those countries that need it the most,
  2. only those who can abuse the loopholes to engage in unbridled speculation, just like the hedge funds with Greece – which again makes the situation worse for the state and its partners/official creditors, or
  3. only those banks that benefit from the money-printing bonanza of the ECB, under its latest LTRO programme – but of course this practice clearly is large scale malinvestment that distorts the capital structure, ultimately paving the road for more bubbles, crises and bailouts.

The second bailout to Greece is nothing more but an ill thought short-term fix, that was agreed upon only for the purpose of pretending that the situation is under control. The unintended ramifications of this deal will be far-reaching and unpleasant. The pressure will be taken off Greece for the next few months or years at best, only to be reallocated in other parts of the eurozone. The sure thing is that we are very far away from a sustainable solution to the problem. There definitely are many issues that cause concerns, skepticism and a general uncertainty about the future of Greece and the eurozone – and needless to say that the Greek interior will simply not comply with the troika’s diktats, with whatever impact that may have on the viability and effectiveness of the new package. All this shall become clear when Greece comes asking a third bailout to finance its debt obligations from 2015-2020.

And who knows what else awaits the poor taxpayers who see their money being wasted in futile policies…