Well flagged … the bailout deal saves face for Greece and keeps the euro illusion alive. Photo: Reuters
The latest bailout proposal is given little hope of success, writes Larry Elliott.
A stay of execution. The most expensive sticking plaster in the world. A rescue deal with shallow foundations. That was the snap assessment of the markets after the 4am deal struck in Brussels to spare Greece the indignity of going bust and to keep alive the myth the euro is working.
The pundits could be wrong. It is possible the €130 billion ($161 billion) bailout will mark a turning point and in a decade Greeks will look back on the dark days of 2012 in the way the newly prosperous Germans looked back in the 1960s to their war-ravaged economy in 1945.
It is all so simple: for a new wonder economy to arise in the Aegean, what has to happen is for Greece's recession to end immediately; for the economy to have six consecutive years of strong growth from 2014 onwards; for the Greeks to submit to their euro zone partners' humiliating terms; for the bailout to be given the thumbs-up by the sceptical parliaments in Germany, Finland and the Netherlands; and for the assorted hedge funds, banks and insurers that make up Greece's private-sector creditors to accept a huge ''haircut'' on their investments.
This is theoretically possible, although it does suggest whatever euro zone finance ministers were smoking in their all-night talks it must have been something strong.
There is scant hope this second bailout will work. The International Monetary Fund knows that, and virtually admitted as much in the briefing note it prepared for the euro group meeting. The Greek politicians who pledged to support the deal before, during and after this spring's election know it also, but feel they had no choice but to agree to a program they know will cause an even deeper recession, higher unemployment and, almost certainly, further civil unrest. The rest of the euro zone knows it too.
Even if, by some miracle, all the preconditions for success were met, Greece's national debt would still be equivalent to 120 per cent of its national output in 2020, putting it on a par with where Italy is today. Greece's biggest problem in the years ahead will be its dismal economic prospects, which will be made still more dismal by the destruction of demand being ordered by the European Union, the European Central Bank and the IMF.
The so-called troika is assuming the Greek economy shrinks by 4.3 per cent this year and holds steady in 2013, before growing at more than 2 per cent a year thereafter. These projections are for the birds; Greece is contracting at an annual rate of 7 per cent and for the troika's forecasts to be met the economy would have to stabilise immediately.
Against a backdrop of wage cuts, spending cuts, pension cuts, collapsing consumer confidence, capital flight and an investment strike, that looks a tad improbable. The IMF admits there is a risk of a deeper recession; what it doesn't say is the risk is exceptionally high.
A second problem identified by the IMF is whether Greece really has the stomach for the pain that lies ahead. A nation already suffering from austerity fatigue now has to accept more pain plus two fresh conditions: the bailout money is to be put into an escrow account that will ensure it is used for debt repayments; and there is to be a permanent troika mission in Athens to monitor the reform program.
In effect, Greece is being stripped of its sovereignty; it will be an independent country in name only. A further condition - it pass legislation making debt repayment the top priority of government spending - may be the moment the worm turns.
In short, this is not the end of the Greek saga. The economy will continue to contract, the debt dynamics will get worse and before long there will be talk of a third bailout. That, though, will not arrive. Next time, Greece will jump or be gently shown the way to the exit.
Guardian News & Media
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