Greek deal faces the fate of its forebears

by Mohamed El-Erian

Financial Times
February 9, 2012

After protracted negotiations, Greece’s prime minister announced on Thursday an agreement on a new adjustment programme. By all indications, it is a courageous and ambitious deal, incorporating more painful austerity measures, substantial official financing, and debt relief from private creditors. Yet the process that has led to this juncture is worrying. There is an uncomfortably high chance that this agreement will have the same fate as previous ones – unravelling within a few months, and for good reasons.

Greece’s seemingly endless negotiations stem from two factors that threaten to derail the deal long before any of its durable benefits materialise. First, it is never easy to reach agreement among parties that have very different perceptions of both the problem and its solution. This is especially true in Greece where all three parties to the negotiations (the government, official creditors and private creditors) feel they have already been asked to do a lot, without seeing any actual or potential reward for their sacrifices.

Successive Greek governments have been forced into several rounds of austerity measures in the past two years. Yet still every meaningful indicator of Greece’s economic and financial state has worsened. This sad reality is also relative to what was anticipated in the recent series of adjustment programmes.

In this period, official creditors have poured money into the country. In the process, eurozone politicians have faced considerable domestic opposition – including, of course, in Germany. They have also risked the integrity and credibility of the European Central Bank and International Monetary Fund.

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