Greek Bailout: 4 Reasons Why it's Not a Done Deal

In my previous post I spoke of Germany's intransigence towards Greece, now we are seeing the fallout of that rigid position:

1. If the Greek Parliament doesn't pass the legislation the creditors have asked for by tomorrow, Wednesday July 15, Greece is out the Euro door, it's Grexit.
 This legislation - regarding pension reform, tax hikes, sale of state assets etc, in short, the whole austerity package - is nothing new. The language is all there, finalized in law proposals. The creditors, through the so-called "troika" negotiators (representatives from the EU, the European Central Bank and the IMF), have been asking for this legislation since 2011.

But no Greek government before Tsipras has dared pass it.

Can he do it?

He has a BIG problem: he must submit a bill with sales-tax increases and pension cuts that go against his own party's pledges. He looks like he betrayed the 61% of Greeks who voted "no" to the referendum he called for when he walked out on the bailout negotiations.

Reports are that he has already lost votes and that the bill may pass - if it passes - with outsider support, causing him to either reshuffle his government, keep on as a minority government or even go to new elections by year-end or sooner.

2. If the Greek Parliament passes the legislation, approval has still to be obtained from 6 other Euro countries before bailout negotiations can resume. The German Parliament is reportedly set to vote on Friday. Thus time will necessarily pass before bailout negotiations can restart. And reports are that this time they would focus on a bigger new loan: as much as €86 billion ($94 billion) and with some (unconfirmed) rumors of debt restructuring as it is become clear to more people that the Greeks can never repay back the full debt.

3. Bridge financing: this is inevitable since Greece has several deadlines to meet on its debt, and has already failed to meet twice with respect to the IMF. By next Monday, it owes a total of €7 billion. The Eurogroup is currently discussing this.

4. Greek banks continue to be closed. Capital controls are in place. Insolvency is near, the European Central Bank is keeping Greek banks on life support, but it hasn't added any funding and won't do so until it sees the result of the vote in the Greek Parliament on Wednesday.

The problem with the Greek banks goes deeper: a good third of their loans have gone bad and they hold Greek debt bonds whose value keeps dropping. There is talk of restructuring and the expectation that the main four banks could be reduced to three or two.

To remedy this, Germany has proposed a €50 billion "Greek Asset Fund" to be constituted with publicly-owned assets - for example, from selling the unused gigantic airport near Athens constructed for the Olympics. Half of that sum, €25bn would be used to fund the cash-starved banking system, a quarter would go to investment within Greece to help support economic growth and the rest to help pay down debt. And all this would be monitored by outsiders, probably the IMF.

This is wishful thinking.

Talk of selling state assets began in 2010, so far only the best assets have been sold, most likely to government cronies, and for a total under €4 billion. Nobody is coming forward to buy the unused Athens airport or the Greek postal system - not to mention that much prized state-owned land on coasts has been built over by private citizens illegally occupying the soil. How quickly can the government free such lands to sell them?

In short, privatization is a dead-end road. The Greek economy, slapped with higher taxes, will immediately sink further. The debt will grow larger and ever more difficult to pay.

Why not restructure the debt? Why is Germany so hard on Greece? 

Because it needs to make an example of Greece for the rest of Europe. It needs to make clear the rules of the game to other members flirting with unsustainable debt in the Eurozone: you make the mistake, you pay for it. Spain, Portugal, Ireland, Italy, you are warned.

And what if there was some hidden agenda in the German game? After all,  it's a well known fact that its own landesbanks are in deep financial trouble, and, as Ambrose Evans-Pritchard recently wrote in the Daily Telegraph, "the German model is ruinous for Germany and deadly for Europe" (see here). He argues very convincingly that Germany's fixation with balancing the budget has already caused untold pain and the collapse (or threatened collapse) of major public infrastructure (waterways, ports etc). As he put it: "France may look like the sick of man of Europe, but Germany’s woes run deeper, rooted in mercantilist dogma, the glorification of saving for its own sake, and the corrosive psychology of ageing...It cannot continue to live off exports of capital goods to China and the BRICS as they hit the buffers, or by stealing a march on southern Europe through wage compression, a zero-sum game."

And we all know that these days, China is facing big problems of its own, with the collapse of its stock market.

Suppose Germany's own banking system wasn't quite as solid as it looks, that could very well be why it can't take either a Grexit or a slashing of the Greek debt and it prefers to muddle through.

Because that is exactly what we are seeing now: a messy, muddling through of the Greek debt that could last years - this is already the third bailout. Do we want a 4th and a 5th?

How long will it take to make Germany understand that a debt "haircut" is inevitable?

Or is "muddling through" the Merkel governing style of choice?

If you're curious to know what Varoufakis thinks of this "bailout deal", read here. He is the Minister of Finance ousted by Tsipras following the referendum, presumably as a move to ingratiate himself with European leaders who couldn't stand his outspoken manner. Indeed. He sees the recent Eurosummit as "nothing short of the culmination of a coup."

Yes, the Greeks are understandably very angry. And hurt.

Related articles

I recommend this article from Reuters just in (click here) with breaking news of a secret IMF study showing that Greece would need far more debt relief than European leaders are willing to consider - it ends on a striking image of a man walking by a mural in Athens (photo by Yannis Behrakis):

Other articles: