Today the sun rose on an agreement to finally deliver the money that Greece needs to keep the lights on.
But European financial markets don’t seem especially impressed. The German DAX Index closed up just 0.55%. The French CAC 40 dipped by 0.08%. Spain’s Ibex 35 lost 0.14%. And the Athens stock market managed just a 0.29% gain.
Why no dancing on the trading floors?
I can think of a few reasons.
First, I think global financial markets have assumed that European leaders would eventually cook up some kind of deal so the announcement today is not a surprise.
Second, I think global financial markets have other worries—the U.S. fiscal cliff, for example.
Third, and most important I think, financial markets are well past the point where they’re impressed with a “deal” that leaves huge holes of unfinished business and that are transparently attempts to kick the can down the road for political purposes.
The deal as announced will send 42.5 billion euros ($55 billion) to Greece starting with 34.2 billion euros in December. The initial December payout of 30.3 billion euros will include 22.4 billion to recapitalize Greek banks and 7.9 billion to help the Greek government pay its bills.
On paper the agreement will cut the country’s debt by 40 billion euros to 124% of GDP by 2020. It would cut the interest rates on loans and extend their maturity by 15 years. Profits of 11 billion euros from the appreciation of Greek bonds purchased by the European Central Bank are to be returned to Greece. And, the agreement envisions a program to buy back Greek debt.
I don’t think anyone really believes that these steps are enough to get the Greek economy growing again. And without growth and with further recession Greece is likely to miss all the targets in this deal.
Assuming the deal actually gets implemented. As usual, it won’t go into effect until it’s approved by national parliaments. That looks likely with even the German Bundestag showing a solid majority for approval.
But that’s not the biggest problem this time. The deal is actually only a tentative deal. The International Monetary Fund won’t hand over its share of the rescue money—about one-third—until after the debt buyback is over.
And that buyback already seems to be in trouble. A statement issued by the Eurogroup of finance ministers said that the prices for the buyback should not be higher than the market price for the bonds at the end of last week. That’s not offering bondholders much incentive to participate and raises the worry that the buyback will fail to generate a reduction in Greek debt large enough to satisfy the IMF that Greece is on a sustainable path to recovery. IMF director Christine Lagarde has said the IMF won’t walk away from Greece, but it’s not clear exactly what that means.
You don’t have to be very cynical to see this deal as an effort to postpone the day of real reckoning on Greece until after German elections in the fall of 2013. The money in the package is enough to get Greece to 2014—unless, of course, the Greek economy tanks faster than is currently anticipated. All the plans for buybacks and interest rate reductions look like an effort to avoid the almost certainly necessary restructuring of Greek debt until after the German elections since restructuring is a real hot button issue in Germany.
The economies of Greece and the rest of the EuroZone may not give the politicians the time they think they’ve bought with this deal. Today, just about at the same time as the announcement of an agreement, the French government reported that the number of unemployed workers in France had climbed to the highest level in 14 years in October.
But in the tradition of European politicians that we have all come to so respect in this crisis, French labor minister Michel Sapin promised quick action: “This run of negative figures on employment only increases our determination to do something to reverse the trend between now and the end of next year.”
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