Where I had thought Greek default inevitable just two weeks ago, I no longer think so today. It appears that Sarkozy, Merkel and the Troika have decided to prevent a default regardless of what Greek politicians or citizens may choose to do.
The new plan is to take the EUR 130 billion that would have gone to Greece in the second bailout, and put it in an escrow account. The account may be labelled “Greek Government”, but Greek politicians will not have any authority over the funds. The funds will be disbursed by a non-Greek overseer to pay holders of Greek debt. Official creditors will receive full payment. Private creditors will receive the new discounted rates agreed with the IIF for restructured debt. I am not sure what private creditors who reject the IIF proposal might receive, but it will not much matter as ISDA will find there is no credit event regardless.
The fear among the creditor states of the eurozone was that irresponsible Greek politicians might use any new money to pay civil servants and pensioners rather than bankers and hedge funds. With funds held in escrow and disbursed by a non-Greek overseer, they needn’t worry about such excesses of sovereign generosity.
This plan amounts to cutting out the middle man – the debtor. Bailout funds are used to bail out Greek creditors, without ever passing through Greek hands.
Athens is left with uncertainty about whether any further funding will be forthcoming for actual Greek state expenses. This is intentional. The escrow overseer may withhold funding if Greek politicians do not live up to creditors’ reform requirements. As Greece may have run a primary surplus in the fourth quarter of 2011, it is just possible that Greece may be able to manage on its austerity budget if the economy doesn’t contract too harshly going forward.
If Greece agrees to the new programme, all the elements agreed in a high-drama October European Union summit will finally be in place: a debt restructuring that will see private bondholders lose half their holdings; €130bn in new bail-out funding; and tough new controls officials hope will ensure Greek reforms are forthcoming.
The question remains whether the restructuring of private debt will achieve the ultimate goal of getting Greece’s debt level down to 120 per cent of economic output by 2020, without calling for bigger public sector contributions.
While this plan solves the immediate problem of a March 20th Greek default, what this means for future repayments of sovereign debt is less clear. Despite never having access to the funds, the Greek government and Greek taxpayers will presumably be obligated to repay their Troika creditors at some point. And the EUR 130 billion will not cover debt payments for ever.
If I were a Greek politician, I could probably live with this deal. While it is humiliating to have the money held and distributed elsewhere, it is still money that forestalls an otherwise certain default. And Greece can always default later anyway, should that prove convenient to avoid repayment of the now even larger debts.
The can is kicked down the road for another quarter, and the bankers can pay themselves their 2011 bonuses.
After all, innovation is the driving force of economic growth, and deserves to be generously remunerated.