BlogSpot - Greece: a new agreement

The Eurogroup reached an agreement on Greece last week (with the Greek government’s comment), reviewed in details in EuroIntelligence:

The deal extends the Master Financial Assistance Facility Agreement (MFAFA) for up to four months (end of June), which is two months short of what Athens requested. There is no mentioning of a third bailout program, nor debt relief, both needed to avoid default according to EuroIntelligence.
The troika becomes "the institutions” and continues to play a role—but the questions of monitoring and enforcement are left unclear.
The Greek government is to come up with a first list of reform measures (see the FT) subject to approval. For EuroIntelligence, this is not such a Greek victory, as the list has to be based on the current bailout, with very much the same measures expected and no clarity on what will happen to the 30% of measures Varoufakis said were unacceptable. In the absence of approval, another Eurogroup meeting will be held, before the bailout expiry on Saturday. Hugo Dixon (Breaking Views) makes suggestions for the list of reforms: creating a genuinely independent tax authority (possibly accompanied by a tax amnesty; removal of tax and social security privileges enjoyed by the rich, the Greek Orthodox church, and the country’s super-rich ship owners), liberalizing markets, setting up a “bad bank.”
The conclusion of the review is not expected before end-April, so Greece has to find €4.7bn for the three month period.
Bank recapitalization funds (€10.9bn) will go back to the EFSF, and remains there at the disposition of banks for recapitalization or resolution only.
The Greek government agreed that it would not roll-back reforms or introduce measures that have a negative fiscal impact, raising questions about Syriza’s pre-election pledges.
The Greek government is expected to deliver "appropriate primary fiscal supluses," explicitly lower for 2015, where the 3% target is likely to be revised downwards.

ZeroHedge also reviews the agreement, and finds that (i) Greece made some concessions in exchange for future leniency, (ii) the deal may not hold, if there is disagreement over the list of reforms to be proposed, (iii) Mr. Tsipras is faced with tensions within the coalition, and (iv) Greece will need more financing, as a result of lower budget surpluses. Paul Krugman (NYT) gives a positive assessment to the agreement, with a lower primary surplus, the avoidance of a credit cutoff, i.e., relaxed conditions for 2015. For Frances Coppola, the agreement opens the essential road for the Greek government to earn the trust of European partners, after a long history of mismanagement.

What are the next steps? Zsolt Darvas (Bruegel) stresses that finding a lasting solution is crucial, after the failures of previous bail-outs. He proposes a new long-term ESM program, with big hurdles, notably on conditionality—with alternatives as a default or a government collapse.

Debt restructuring? Wolfgang Munchau writes that next steps will revolve around debt restructuring, as a reduction in the Greek primary surplus is not consistent with Greek debt stocks. Aside from a haircut, options include sovereign equivalents of debt-for-equity swaps, GDP linked bonds, parallel currency schemes, plus of course maturity extensions and interest rate cuts. On GDP-linked bonds, Angel Ubide and Eduardo Levy Yeyati point out that Argentina’s experience proved to be very costly, because of the temptation to cheat with GDP statistics, the higher risk premium and costs. For Greece, as interest rates are already low, gains by pegging interest payments to future growth paths will be quite small. Ubide and Yeyati propose a simpler intermediate option, to modify the current EU and ESM loans so that Greece will be able to pause servicing them if growth falls below a predetermined threshold.
Imposing capital controls? Hans-Werner Sinn argued that current ECB liquidity provision merely postpones the time until capital controls are imposed. Marios Zachariadis (Macropolis) responds that the eurozone should allow and technically assist Greece to set up a tax based capital control on outflows rather than quantity based controls.
Reaching a deal on growth and reforms? Dani Rodrik, in Project Syndicate, focuses on the economics of growth for Greece, and writes that increasing Greek competitiveness requires remedies targeted at specific binding constraints faced by exporters. A Greek program that identifies these constraints and proposes remedies would be much better economics than blind adherence to the troika's laundry list of structural reforms. Anna Diamantopoulou also argues that reaching a compromise on debt payments and investment will likely be easier than finding common ground on structural reforms.

Looking back at the role of austerity… In a VoxEU article, Lars P Feld, Christoph M Schmidt, Isabel Schnabel, Benjamin Weigert, and Volker Wieland suggest that the Greek debt service burden is fairly tolerable and support auterity policies. In another VoxEU entry, Benjamin Born, Gernot Müller, and Johannes Pfeifer present new evidence on how financial markets assess austerity and find that austerity, while being painful in the short-run, pays off in the long run. Simon Wren-Lewis, and Paul Krugman, responds that austerity would have been much less costly if the adjustment had been more gradual. For Wren Lewis, adjustment in an environment of Eurozone recession and deflation, caused by fiscal austerity in the non-periphery countries, made restoring competitiveness very painful. Kemal Dervis, in Project Syndicate, takes a broader perspective and argues that social fragmentation and political instability in Europe will intensify unless eurozone leaders rethink an approach based on a strict policy focus on fiscal austerity and structural reforms.