Wall Street Journal: Greece Ends One Crisis and Braces for the Next

Who would have thought, as the results of Greece’s referendum on July 5 were coming in, that five weeks later we would be here? The Greek people responded to what was then the most recent offer from creditors with a resounding “no,” as they had been urged to by Prime Minister Alexis Tsipras. He promised that a “no” vote would strengthen his negotiating position and wouldn’t threaten Greece’s membership in the euro.

   Things turned out very differently. Mr. Tsipras’s referendum success inspired other eurozone leaders to support German Finance Minister Wolfgang Schäuble’s proposal for a Greek “time out” from the euro. Confronted with this threat, Mr. Tsipras capitulated to demands that in some cases were more stringent than those that Greek voters had rejected days earlier.

   Less than a month later, with surprisingly little fuss, the two sides have reached an agreement on a third bailout. Taking into account the Greek economy’s relapse into recession, the fiscal targets for 2015-17 have been weakened. The goal is to achieve a primary deficit (before debt-service costs) of 0.25% of gross domestic product this year and a primary surplus of 0.5% of GDP next year, rising to 1.5% in 2017. This is far off the targets of 3% in 2015 and 4.5% in 2016-17 under the previous deal.

   Furthermore, the ambitious target currently envisioned for 2018 - 3.5% of GDP - could be revised downward if there is a deal in the autumn for long-term debt relief. Locking in current, ultralow interest rates on the loans from the European Financial Stability Facility, which make up nearly half of Greece’s debt, would reduce debt-service costs and eliminate a central rationale for larger surplus targets.

   Why the Greek people had to spend six months on the verge of a collective nervous breakdown and the economy had to tumble back into recession for this to be agreed upon is something all the main players in the negotiation ought to ponder.

   The most important thing now, though, once the deal is approved on a political level, is to look to the future and to the best way to make the new program work. Debt relief, though important, is only part of the solution. Two priorities must be recapitalizing the banks and boosting investment.

   One urgent question is the extent to which uninsured depositors will be forced to take haircuts on their deposits - a bail in. This was done in Cyprus after its 2013 crisis. Unlike that island, the affected depositors in Greece would mostly be Greek companies, not Russian oligarchs. Yet direct recapitalization through the European Stability Mechanism isn’t possible without a bail-in.

   The two sides seem to have agreed that there will be no bail-in. The likeliest solution is that Greece will be saddled with up to €25 billion ($27.44 billion) in additional debt, which will be used to recapitalize the banks. The best outcome, as some have noted, would be for the relevant rules to change, allowing the ESM to participate in the recapitalization without prior recourse to a bail-in. This would immediately bring back confidence and allow capital controls to be lifted.

   Another problem is the flood of nonperforming loans drowning bank balance sheets. The new agreement kicks this can down the road: Creditors rejected Athens’s proposal for a state-run bad bank, and Athens resisted pressure to get banks to sell off loans en masse to distressed-debt funds.

   Over the longer term, Greece needs to entice both domestic and foreign investors again. Investment has collapsed, to 11% of GDP last year from 25% in 2008. The European Commission could help by quickly mobilizing the €35 billion earmarked for Greece under a European Union-wide investment scheme developed by Commission President Jean-Claude Juncker. Mr Tsipras’s government can vigorously implement new pledges to simplify the regulatory framework for low-risk investment projects and reforms that stimulate investment and competition - reforms previous governments failed to push through.

   Finally, even if growth picks up faster than expected, Greece will have to contend with mass unemployment and its dramatic social consequences for a long time to come. Athens could help matters if it makes a meticulous effort to target social spending on those in need, weeding out the likes of fake farmers and early retirees who currently receive but don’t deserve hand-outs.

   The vital condition for any of this to work is political stability - a calendar free, for the next two years, of election dates. That looks less and less likely as Mr. Tsipras struggles to manage an internal rift within his party, raising the prospect that an election may come as early as next month. Greece’s latest crisis is ending. The next one may soon begin.

Πηγή: wsj.com