What was really agreed last night in Brussels

On the basis that if Jean-Claude Juncker denies something, it’s probably true, it’s worth examining the deal cranked through Brussels last night to “save” Greece. Juncker and his fellow eurocrats insist it doesn’t involve any debt forgiveness for the benighted country.

And that’s odd, since the more one examines it, that’s precisely what this looks like. As a result of this deal, eurozone governments (in other words taxpayers) will have to take a hit on the billions of euros of loans they’ve given to Greece. Whatever name you give to it, euro member states will forfeit a hefty chunk (Dario Perkins at Lombard Street Research reckons it amounts to a potential €12bn) of cash.

Here’s the simple version of the story: euro governments will voluntarily allow the Greeks to pay lower rates on their bail-out loans; they will also donate (not loan) Greece the proceeds they earn from the European Central Bank’s bond-buying programme. Greece will not have to pay as much cash back; the lenders will not get as much cash back.

Were this a private sector loan agreement, the probability is this would be regarded as a technical default.

But this being Brussels, that simple story has been shrouded with just enough to complexity to bamboozle the majority of outsiders into believing it really is a pain-free solution. Here, for those with the sanity to avoid the communique [pdf], is how it works.

  • The interest rate on the original loans to Greece will be lowered by 100bps, which will save the Greek government/cost euro governments €4.2bn by 2020 (the sums here are from LSR – don’t expect anything as blunt as numbers from the eurogroup)
  • The guaranteed fee costs paid by Greece on its EFSF loans will by cut by 10bps. (around €600m)
  • The maturity on bilateral and European Financial Stability Facility loans will be doubled from 15 to 30 years, with a deferral of 10 years on EFSF loans  Paying the loans off more slowly will save Greece large sums, although that depends on whether the deferred interest payments are accrued – the communique is unclear on this.
  • EU member states will return Greece the profits they make on Greek bond purchases under the SMP. LSR reckons this is worth around €7bn.
  • Greece will now get the latest tranche of its bail-out cash (remember, the stuff above refers to previous bail-out money), worth €43.7bn euros.
  • It will also be allowed to buy back some of its debt at a knock-down price – although there is a big question about where it will actually get the cash to do that, probably the EFSF. There is also a bigger question about how much Greek government debt is actually out there to be bought, since most of it is already owned by the very European institutions who would be lending Greece the money to buy it back. According to Raoul Ruparel of Open Europe probably only about 10% of the country’s bonds could be eligible for purchase.
  • Meanwhile, the eurogroup deferred the existing target for Greece to get back to a 4.5% of GDP primary surplus (eg when debt payments are ignored) from 2014 to 2016. The special escrow account into which Greece must pay its debt repayments will be strengthened, but, crucially, there’s no specific effort to try to recoup the billions of euros the euro members will forgo as a result of all of the above.

The upshot of all of this will, according to the communique, be to get the country’s net debt down to 124% by 2020, which is lower than the 120% target Christine Lagarde had been arguing for previously.

But while the International Monetary Fund MD might be disappointed about that, she can at least be reassured that the IMF won’t lose any money as a result of last night’s deal. The entire €12bn or so hit will be absorbed by European governments, since they recognise that to allow the IMF to lose any money would cripple the credibility of the institution entirely.

Because the IMF won’t lose anything, that means Britain’s contribution to the bail-out is also safe. It will receive all its interest repayments precisely as was always agreed.

Anyway, when you run through all of the above it’s hard to escape the conclusion that what was agreed last night was a kind of stealth debt forgiveness.

Greece is so deeply mired in the credit quagmire, and so trapped in a depression worse than the Great Depression, that, eventually, its lenders will probably have to go the whole hog and write off principle amounts of debt. But for the time being, the best they can do is to subtly reduce the interest and maturity element of what’s owed.

The subtlety is necessary here because to have completely forgiven the debt ahead of the German election would have been political suicide for Angela Merkel.

And, on balance, you have to say that what was agreed last night was, at least, a step in the right direction. As I’ve written before, at some point Greece’s enormous debts will have to be written off – whether through agreement or default. The sooner Europe faces up to that, the better.

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