Grexit now more likely after latest Eurozone ‘deal’

The Eurozone has announced  what the headlines refer to as a ‘deal’ on Greece , emerging  from yet another all-night negotiating session. History suggests that agreements reached in the wee small hours by sleep deprived participants can look very different to at least some  bleary eyed negotiators in the clear light of day, but that aside the agreement is  quite extraordinary, and breaks new ground in terms of euro zone governance. Indeed, such is the departure from previous discussions with debtors that, if anything, it increases the risks of Greece leaving the euro.

The text of the Euro Summit on Greece opens with a statement on  the need to rebuild trust with the Greek authorities and to that  end  Athens has to pass legislation, by Wednesday 15 July, on a range of measures, including pension reform , changes to the VAT system, the independence of  the state statistical service and the setting up of a Fiscal Council. In addition the legislation should include ‘quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets’ and by the following week new laws  changing the civil justice system. The ECB will maintain the existing level of ELA for a little longer, to focus Greek minds, while the banks will remain shut.

Upon a satisfactory conclusion of the above, and subject to the approval of ESM member states, negotiations may start on a new loan, but Greece has also to set out a timetable for the implementation of  another raft of reforms, including further changes to the pensions system and  significant moves to liberalize retail markets , the professions, labour markets and the financial system. The energy transmission mechanism is also to be privatized, and in that context the text also proposes  an unprecedented step, in that Greek assets are to be sequestered into a separate fund for privatization, with the intention of raising €50bn, to be used to finance the recapitalization of the banks, to run down debt and to fund investment.  Moreover, Greece also has to undo some of the legislation brought in by the new Administration  and is required to ‘consult and agree with the Institutions on all relevant areas before submitting it for public consultations or to parliament’

The Hellenic Republic will also have to seek a further IMF loan and a total bailout figure of €82bn to €86bn is envisaged, although the text also notes that fulfilling the initial conditions does not guarantee that a  loan will follow. The Eurogroup may consider debt extensions and changes to interest rates but ‘ nominal haircuts on the debt cannot be undertaken.’

Some might consider all of this a move to shift Greece towards a Northern European style market economy and one consistent with euro membership  while others have already branded it as a ‘coup’, with the Eurogroup  accused of seeking regime change . The degree of interference and control from Brussels is certainly a new departure as is the idea of preconditions before negotiations can even begin. The latter certainly increases the risk that political support in Greece will not materialise, particularly as the electorate have already rejected a less severe version of the measures now mandated. In addition, implementing reforms, even if passed by parliament, may prove extremely difficult , if not impossible.  A debt write down is also not on offer, even though many, including the IMF, see the debt situation as effectively unsustainable.

Perhaps the most striking development over the weekend was the German proposal that Greece could take a 5-year timeout from the euro area. Leaving aside the practicality of such a move the fact that it was put into the open ( although not in the final text)  shows that Grexit is no longer seen by some creditors as a disaster, Indeed, the ‘take it or leave it ‘ tone  of the offer is also striking (‘the risks of not concluding swiftly the negotiations remain firmly with Greece’) and one can only conclude that the probability of a Greek exit from the eurozone has increased, either  through a Greek rejection of the proposals or via some creditors still  baulking at what they see as the futility of throwing good money after bad.