Greek deal buys time, but drift towards debt write-down

A deal struck Tuesday to cut back Greek debt to creditor countries and the IMF paves the way for easier cashflow management in Athens, but analysts warn the paths identified simply buy time. "The Greek deal is like a car made from junkyard parts that can collapse at the first bump in the road," said Sony Kapoor, a London School of Economics Fellow and head of the Re-Define economic consultancy. "It is a very fragile contraption." The eurozone and the International Monetary Fund agreed to unlock 43.7 billion euros ($56 billion) in loans and on the need to grant significant debt relief for decades to come. Four loan instalments from December 13 through until the end of March are conditional on Greece funnelling the income back to creditors and on the implementation by Athens of tax reforms settled with creditors. A mixture of techniques will be used to bring down Greece's debt burden from an estimated 144 percent of gross domestic product to 124 percent come 2020, and a ratio "substantially below 110 percent" by 2022. These will begin with a buy-back by Greece of old debt that has fallen in value on commercial money markets as well as national central banks across the eurozone foregoing profits on holdings of debt whose worth has slumped. One senior eurozone source, speaking off the record, said the buy-back was "the first step" towards a write-down of the debt. The IMF is pushing for a so-called "haircut" or write-down, but Germany has come out against this ahead of a general election next year, even if other Triple A-rated states have said they would "not exclude" the possibility from 2015 onwards. Interest rates will also be trimmed or deferred, while maturity dates will be pushed back by years. "These measures are sensible," said Zsolt Darvas of Brussels think tank Bruegel, although he said lending rates should fall to zero, repayment not kick in until after 2030 and be indexed to growth in the Greek economy. However, the absence of "clarity" about the buy-back could maintain gradual capital outflow, weak economic performance and further falls in employment, he said. This could revive the vicious circle of "social pressure on the government and the parliament," resurrecting fears of government collapse and a chain of events leading to a euro-exit. Capital Economics, which has long been sceptical of efforts to rescue Greece and keep it in the eurozone, said the "relatively easy options are running out fast." The drift is moving towards an echo at government level of the gradual dawning among banks and insurers that they would have to take losses on Greek debt. For Michala Marcussen of France's Societe Generale, "official sector debt forgiveness [is] a very real, but politically challenging, possibility". She said even with the new measures 2017 is likely too soon a target for Greece to return to market financing on anything other than the shortest-maturity issuance. The time for a haircut is not now, said Christian Schulz of Germany's Berenberg. "This would have done little to improve Greece's immediate financial situation and resistance to such a move in Germany could have sparked market fears over a potential aid package for Spain," he said. Schulz added that ongoing "street protests and the independence movement in Catalunya (Catalonia) also highlight the political risks of front-loaded austerity," although the deal certainly "buys more time."