Greece’s debt deal will set a precedent for how wealthy Europe treats its less fortunate nations
Greece’s debt deal will set a precedent for how wealthy Europe treats its less fortunate nations ·CNBC
Willem Marx
Updated
Not so long ago, at the height of the so-called euro zone crisis, the phrase "Greek debt" graced headlines and news bulletins on a daily basis, and remained at the forefront of investors' minds for weeks if not months at a time.
In the current age of Brexit and Conservative Party resignations, that is no longer the case. But for Greek citizens who have suffered years of government cuts and international opprobrium, the issue has never faded from the national consciousness. And that holds just as true for an army of European bureaucrats and politicians who are now tasked with closing the book on what many consider to have been the most frightening chapter in modern Europe's financial history.
In a couple of weeks' time a group of international debt inspectors will land in Athens, where they will gain access to the Greek government accounts and pore over its policy proposals for what may be the final time. If this team of forensic economists comes away satisfied with the local authorities' reform efforts, as well their finances, it should in theory mean that European leaders will be able to settle on a long-term plan for the struggling country's hundreds of billions of euros in outstanding debts by the end of June.
The unraveling then repackaging of Greece's national debts has proved a long and tortuous journey for all involved, with eight years of tight supervision by a handful of foreign governments and funds, over the course of three separate bailouts. But unless a major roadblock appears between now and then, August 20 will mark the first day in almost a decade that Greece's leaders — most prominently Prime Minister Alexis Tsipras and his finance chief Euclid Tsakalotos — would regain full control over their own spending. The alternative — a continuation of foreign supervision of government accounting that exists today — would be far from politically palatable for Tsipras as he prepares for national elections next year.
For that to be avoided though, decisions beyond his direct control will need to be taken. For not only must the Greeks themselves show that they have met the dozens of various commitments imposed on them by their creditors, with further progress still required in areas such as the privatization of state assets, reforms to the energy sector, and rules around property foreclosures. But euro zone finance ministers must agree on how the country's debt load — currently equivalent to 180 percent of GDP (gross domestic product) — can be reduced, delayed or otherwise recalculated.
The International Monetary Fund (IMF) has thus far very publicly refused to participate in the current bailout round, which formally ends in August, because its in-house models for Greece's economy indicate the current debt repayment program is not sustainable — even though Athens has managed to beat some recent budgetary predictions. The continued absence of the IMF poses a potential problem for Greece's investors — both current and future — since the Fund's involvement in a debt program tends to boost confidence that repayments can and will be made by a nation that has previously faced default.
Speaking in the Bulgarian capital of Sofia last week, European Commissioner for Economic and Financial Affairs Pierre Moscovici told me the EU believes its models may be more accurate, but argued that the best way to win an IMF buy-in would be to agree on a debt repayment mechanism first proposed by his countrymen — and one of his successors as French finance minister — Bruno Le Maire. Macron's finance chief told me separately that he hoped to win over opponents to his plan, a "growth adjustment mechanism" that would automatically link future debt repayments to Greece's relative economic success: Athens would repay larger installments if its economy expands quickly, and reduce payments if it slows, a process that its proponents claim provides market participants with greater clarity and transparency.
Arrayed against the French plan is the desire on the part of authorities in countries like Germany, the Netherlands, Finland and Austria to maintain a degree of political control over Greece's required repayments. This might mean the size and scope of future repayments could be assessed by national parliaments, rather than automatically calculated based on factors like GDP growth. The publicly espoused view in Berlin is that such an approach would force the Greeks to continue with their structural reforms and austerity measures that have helped transform what was a 15 percent budget deficit in 2009 into a recent surplus. The new man at the top of Germany's finance ministry, Olaf Scholz, so far seems to be almost as tough as his predecessor Wolfgang Schaeuble, a man who famously earned the nickname "Dr. No" during Greece's initial debt negotiations, was labeled "dishonest" on occasion by his Greek counterparts, and even clashed with the IMF and his own cabinet colleagues over German lending.
Whatever the eventual deal, Le Maire is not alone in repeatedly stressing the urgency of these conversations. The Greeks have now published their latest economic proposals for a post-bailout world, designed to show markets that they will continue with reform efforts even without such external pressure. They are also intent on building up a sizeable cash buffer, drawn from unused bailout funds and their own budgetary surpluses, so they can weather the whims of the market and hit their first few repayment deadlines after August.
Time is once again tight to find common ground and cobble together a solution. But any final deal will be viewed by many across Europe as a proxy for how the continent's wealthiest nations treat the less fortunate — or indeed less responsible — of the bloc's members.
