Greek deal is rational, predictable, messy

May 25, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Greece’s latest deal is rational, predictable, and messy. The euro zone’s ongoing problems frequently elicit a hoary cliche about governments not fixing problems, but merely kicking the can down the road. This doesn’t even go that far.

European lenders to Greece have been grinding out a deal that convinces the International Monetary Fund to sign up to Greece’s third bailout, which would release 10.3 billion euros of fresh funds. The snag was that the IMF has been demanding upfront unconditional debt relief from euro zone lenders, and a lower budgetary surplus target to make up for Greece’s dismal growth. Giving Greece too gentle a ride would have fuelled German opposition to fiscal transfers, a risky situation given rising anti-euro sentiment and looming Federal elections in Europe’s largest economy.

The IMF got some of what it wanted. Euro zone lenders will swap some of their shorter-dated debt for longer maturities, making the most of the cheap funding provided to markets by the European Central Bank. After 2018 they may agree to cap interest rates and defer interest to limit Greece’s financing costs. And after that Greece will no longer be expected to keep a demanding fiscal surplus of 3.5 percent before interest costs.

Yet the IMF has given ground too. Financing costs will be capped at no more than 15 percent of GDP, not the 10 percent it wanted. Greece’s budget surplus will be whatever euro fiscal rules dictate, not the 1.5 percent the IMF called for. The scale of debt relief will depend on what is deemed necessary at the time, and the euro zone can back out. As a sweetener for these compromises, the IMF may find some of its lending to Greece repaid early with euro zone funds.

The deal is probably a better one than Greece would have gotten if it had not elected the radical Syriza in 2015. But such nebulous and distant benefits will not be a big help to Greek Prime Minister Alexis Tsipras in keeping his thin parliamentary majority. He must push through austerity equivalent to 3 percent of GDP and further reforms. Given the still-present risk that Greece tips into instability, which could in turn intensify Europe’s refugee crisis, it’s small wonder the creditors chose to delay tough choices.

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