Grexit probably won't happen before September. Even to achieve such modest accomplishment, two things need to happen. First, Greece needs to give creditors whatever they ask. If we take the July 13 proposal as a guide to the final bailout programme, such submission will be hard to take.
Greece will be back under financial assistance within weeks
The deal on the table is more demanding than anything we had seen in June – and certainly more stringent than what Athens put to a popular vote on July 5.
Some members of Syriza won't have any of it, and are putting the process at risk. But the bailout counts with support from moderates in the opposition, as we saw at the July 16 and 22 Parliament sessions. Prime minister Tsipras and his cabinet may not survive, but calling fresh elections would be risky. Instead, if the government wobbles, either a grand coalition or a technocrat administration will probably see the bailout through.
The second thing we need is a little will from creditors. So far their actions have been important for their symbolism, not for their material help. The European Central Bank (ECB) has raised the emergency liquidity line to the Greek central bank, but the increase is too small to allow Athens to lift capital controls. On July 16 the eurozone’s finance ministers approved a €7 billion bridge loan. Of those, however, €4.2 billion went out the door almost immediately to pay the ECB, and €2 billion more for the IMF.
Next, a handful of European parliaments still need to vote on the bailout. Germany, France, and Finland already said 'yes.' Austria, Estonia and Spain will almost surely give their nod. The tough cookie is tiny Latvia, whose prime minister said: “It will be very difficult for me to convince parliament.” A “no” would, at best, delay the deal; at worst, kill it.
Suppose a bailout programme is signed, what then? Misery for Greece, and recurrent spasms. Judging from the letter and spirit of the July 13 pre-agreement, the new program will work as a “pay-as-you-go” bargain. Greece will get a tranche of the loan, every few months, if it complies with a schedule of reforms, fiscal goals, and privatizations.
One reason creditors are now such hard-liners is Greece's bad reputation. In June, breaking off negotiations and calling the referendum was not well taken in Brussels. Greece’s bad form has earlier precedents. Take – off a long list – privatisations. In 2010 creditors set a €50 billion fund-raising target through the sale of public assets.
In 2013, not seeing any progress, creditors lowered the goal to €23 billion, to be met by 2022. Today, the IMF says proceeds are just €3 billion. Now the July 13 statement demands the creation of a fund where Greece will deposit “valuable assets” to be eventually sold under “external and independent” control – that is, whenever and however creditors decide.
Conditions on the third bailout will be tough – and creditors will be sticklers. This unpleasant combination guarantees periodic noises of Grexit, as Greece fails to meet one or another target. The first big deadline comes this autumn, when stress tests will verify whether Greek banks have been recapitalized.
Despite the hazards, Greece will likely be back under official financial assistance within weeks, as it has been since 2010. Some things, however, won't be the same. It has transpired that Germany’s finance minister, Wolfgang Schäuble, wanted a provision in the July 13 pre-agreement for a temporary Grexit. What this and other gestures from the past three weeks mean is that the eurozone’s integrity is no longer a sacrosanct commitment. Although not explicitly stated, it’s widely understood that Greece’s membership is now a mere contract. Confidence in Greek banks or Greek bonds will not return for years.
What would make Grexit less likely in the medium term? First, I think the German finance minister must go. Just like his counterpart Varoufakis proved toxic in negotiations, hardliner Schäuble prevents a reasonable deal. Second, and a sine qua non remedy, is debt relief. The July 13 pre-agreement leaves out debt forgiveness, and postpones a decision on maturity extension.
On the current path, things are bound to end badly. Sensible macroeconomic forecasts show that Greece’s debt-to-GDP ratio will keep rising. This was known two years ago, but now the IMF publicly acknowledges so.
In the medium term fiscal surpluses are achieved at the cost of lower growth, lowering the debt ratio’s denominator faster than it lowers the numerator. The program currently under construction makes this negative loop worse, as it imposes “quasi-automatic spending cuts” if the fiscal surpluses fall below ambitious targets. Assuming Greece puts itself through the wringer for three years, in 2018 debt will have climbed north of 200% of GDP, Greece will still be unable to borrow in the market, and a fourth bailout will be needed. Greeks might stop caring for the euro before then.
