By Larry Elliott
A stay of execution. The most expensive sticking plaster in the world. A rescue deal with shallow foundations. That was the snap assessment of the markets on Tuesday about the 4am deal struck in Brussels to spare Greece the indignity of going bust and to keep alive the myth that the euro is working.
The pundits could be wrong. It is possible that the €130bn (£110bn) bailout will mark a turning point and in a decade's time Greeks will be looking back on the dark days of 2012 in the way that the newly prosperous Germans looked back in the 1960s to their war-ravaged economy in 1945.
It is all so simple: for a new wonder economy to arise in the Aegean what has to happen is for Greece's recession to end immediately, for the economy to have six consecutive years of strong growth from 2014 onwards; for the Greeks to submit to their eurozone partners' humiliating terms; for the bailout to be given the thumbs-up by the sceptical parliaments in Germany, Finland and the Netherlands, and for the assorted hedge funds, banks and insurers that make up Greece's private-sector creditors to accept a 53% "haircut" on their investments.
This is theoretically possible, although it does suggest that whatever eurozone finance ministers were smoking in their all-night marathon talks it must have been something strong.
There is, in truth, scant hope that this second bailout will work. The International Monetary Fund knows that, and virtually admitted as much in the briefing note it prepared for the Eurogroup meeting. The Greek politicians who pledged to support the deal before, during and after this spring's election know it also, but feel they had no choice but to agree to a programme they know will cause an even deeper recession, higher unemployment and, almost certainly, further civil unrest. The rest of the eurozone knows it too, deep down.
Even if, by some miracle, all the preconditions for success were met, Greece's national debt would still be equivalent to 120% of its national output in 2020, putting it on a par with where Italy is today. Greece's biggest problem in the years ahead will be its dismal economic prospects, which will be made still more dismal by the destruction of demand being ordered by the European Union, the European Central Bank and the IMF.
The so-called troika is assuming that the Greek economy shrinks by 4.3% this year and holds steady in 2013, before growing at more than 2% a year thereafter. These projections are for the birds; Greece is currently contracting at an annual rate of 7% and for the troika's forecasts to be met the economy would have to stabilise immediately.
Against a backdrop of wage cuts, spending cuts, pension cuts, collapsing consumer confidence, capital flight and an investment strike, that looks a tad improbable. The IMF admits that there is a risk of a deeper recession; what it doesn't say is that the risk is exceptionally high.
A second problem identified by the IMF is whether Greece really has the stomach for the pain that lies ahead. A nation already suffering from austerity fatigue now has to accept more pain plus two fresh conditions: the bailout money is to be put into an escrow account that will ensure it is used for debt repayments, and there is to be a permanent troika mission in Athens to monitor the reform programme.
In effect, Greece is being stripped of its sovereignty; it will be an independent country in name only. A further condition – that Greece pass legislation making debt repayment the top priority of government spending – may be the moment the worm turns.
From the perspective of Germany or the Netherlands, these safeguards are the bare minimum necessary to convince the sceptical taxpayers of northern Europe that Greece won't simply pocket the cash and then – as in the past – soft pedal on economic reforms. The Dutch government, in particular, has taken a particularly hard line and has hinted that it would withhold approval of the deal unless there is strong evidence that the Greeks are keeping to their side of the bargain.
Finally, there's the little matter of Greece's private-sector creditors. Here, there are two issues: will investors accept losses of more than 50% on their Greek holdings while the central banks walk away scot-free? And given that the endgame for Greece is supposed to be that it gradually weans itself off support from official sources and returns to the capital markets, will any private investor want to touch the country with the proverbial bargepole? The likely answer is no on both counts.
In short, this is not the end of the Greek saga. The economy will continue to contract, the debt dynamics will get worse and before long there will be talk of a third bailout. That, though, will not arrive. Next time, Greece will jump or be gently shown the way to the exit.
http://www.guardian.co.uk/world/2012/feb/22/plaster-leaves-greece-independent-name
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