The Greek debt deal: Thumbs down

Economist
February 21, 2012

After another all-night summit, a deal between Greece and the troika (the EU, ECB and the IMF) has finally been reached. It involves the expected combination of measures - a private sector write-down, more loans from the EU in return for austerity measures and enhanced monitoring of Greek compliance. After all that effort, Greece will still have a debt-to-GDP ratio of 120%, which looks more than it can afford.

Markets have duly been unimpressed today, although of course a deal may have been priced in. But the FT story about a confidential paper on Greek finances only illustrates that this is a short-term fix and that further bailouts will be necessary.

It is hard to find an analyst who is impressed with the deal. First, there is the issue of overoptimistic forecasts. Lombard Street Research writes that

The troika assumes that the new austerity policies will improve the Greek public finances but have only a modest impact on economic growth. In their baseline scenario, GDP is expected to contract by just over 4% in 2012 and then stabilise in 2013 before growing robustly (at over 2% pa) thereafter. This, of course, is ludicrous and runs counter to all the evidence accumulated over the past couple of years.

This is probably the last Greek bailout we will see, but not for the reasons the authorities are claiming. Neither the Greeks nor the EU will have the patience for another round of negotiations once this latest package unravels.

More