M&G: Keine Win-Win Lösung

Background:  The European authorities have announced that the ESM (European Stability Mechanism) will be activated in order to bailout Greece.  The key measure is that Greece will be required to place Euro 50 bn of assets into a privatisation fund.  Most of this will go towards debt payback, but Euro 12.5 bn will go towards growth initiatives.  The measures will require agreement from the Greek parliament, so this is another hurdle to overcome before a deal is formally done.

"The news that a Greek deal is now likely is good for the stability of global capital markets, and at a time when global growth has wobbled - in part due to the European situation but also as China slows quickly - it helps reduce the risk that we once again fail to reach escape velocity from the Great Financial Crisis.  We mustn't take Greek domestic approval for granted - after all this deal goes against much of what Tsipras's own party believes in, and against what the population overwhelmingly agreed to in the recent referendum.  However, it feels likely that we will see the current crisis come to an end, especially if politicians continue to emphasise the growth friendly element of the deal.  A bigger question is, of course, how far has the can been kicked down the road?  The deal helps immediate liquidity, but does little to reduce Greece's debt burden.  With a debt to GDP ratio of nearly 180% and without growth, delevering cannot take place.  We will inevitably be back in this same position again within the next few years.  The bund is lower on the news, and peripheral bond yields are outperforming as you'd expect. 

Thinking of the bigger picture I think we will have to start thinking about some more radical solutions to Greece's unsustainable debt burden; GDP-linked bonds have been talked about in the past, and would reward creditors for delaying immediate interest payments by paying higher amounts in future as growth came through.  Reform of Europe is necessary; we will be back in this situation again - maybe with Greece, but potentially with any other EZ member - unless Europe thinks about the flaws in the eurozone system  Without fiscal transfers between states this is not an Optimal Currency Area and there is no mechanism for dealing with deficits and surplus imbalances across the region.  There needs to be.  Finally, and importantly, the deal today is trivial in terms of a hit to EZ GDP and the creditors.  At only 3% of EZ GDP Greece's debts could have been wiped out entirely.  But the authorities have had to think very carefully about the issue of moral hazard.  If the Greek bailout looks too generous, then Podemos in Spain, and others, might be encouraged to force major debt relief for much larger economies.  So today's compromise looks as good as it could have been for all involved - there was no win-win solution available."

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