(Bloomberg Opinion) -- In a way, the debt relief deal Greece has received as it exits its bailout makes good sense: It keeps the country on a tight leash, all but eliminating the possibility that it will go on a borrowing spree in the financial markets and misspend the money as it’s done before. On the other hand, the scheme gets superimposed uncomfortably onto the country’s political cycle: It puts the next government on the spot, making a backlash against it all but inevitable.
The deal hammered out by the Eurogroup, comprising the euro zone finance ministers, extends by 10 years the maturities of 130.9 billion euros ($152.4 billion) in old bailout loans, which make up about 40 percent of Greece’s total debt. They are already due in more than 30 years, but the new deal also defers interest payments on them by a decade. Besides, Greece gets 15 billion euros in cheap funding (the average rate for these bailout loans was 1.62 percent as of the end of March) that it can use to repay expensive debt to the International Monetary Fund, some 2.6 billion euros of which is due by the end of 2019.
It’s at the higher end of what was expected given Germany’s decidedly ungenerous stance on Greek debt, and it’ll let Greece tap the markets, though as Bloomberg Opinion’s Marcus Ashworth writes, it’s not clear investors will turn up in their numbers. The debt deferments are contingent on a large primary surplus (before debt repayments and interest) of 3.5 percent until 2022 and then 2.2 percent until 2060, as well as a whole program of tough economic and governance measures, which will be controlled by the creditors in the course of quarterly inspections. In other words, the country’s exit from the bailout program is far from clean.
It’s easy, therefore, for the political rivals of Prime Minister Alexis Tsipras to claim that Greece doesn’t get much out of the deal and that it’s not really a bailout exit. “Nothing exciting,” Costis Hatzidakis, vice president of the opposition New Democracy party grumbled about the exit terms. He described them as putting Greece in a “fish bowl” until 2022 with enough cash to pay off maturing debt but not much ability to borrow privately: The interest Greece has to pay on bonds is still too high at about 4.2 percent.
That fits the recent assessment of a group of European economists led by Jeromin Zettelmeyer of the Peterson Institute of International Economics. They wrote:
In the best-case scenario, Greece would maintain high primary surpluses until 2022 or 2023, but a longer period of exceptional fiscal discipline, as imagined by the Eurogroup, is very unlikely. By the late 2020s, it will be clear that the Greek debt dynamics are again unsustainable. At that point, however, the costs of restoring Greek debt sustainability will be much higher than they are today, because a large new stock of expensive private sector debts will have accumulated in the meantime. These debts would either need to be restructured or — in effect — repaid by the European official sector.
New Democracy isn’t just making populist noises. It’s highly likely that it will run the next government, to be elected by October, 2019. It has led the polls since 2016, gradually expanding its lead over Tsipras’s leftist Syriza bloc. Tsipras appears resigned to a loss next year and mainly interested in assuring his legacy: That would explain his recent efforts to resolve the dispute with neighboring Macedonia over its name, to which Greek governments have long claimed the former Yugoslav republic has no right. The compromise has led to suggestions that Tsipras deserves a Nobel Peace Prize, since the name deal would remove a major obstacle to the entire former Yugoslavia’s ending up in the European Union, but it doesn’t help Tsipras at home where most Greeks oppose it.
If the center-right New Democracy wins next year and consolidates power, quick economic gains will be required if it hopes to keep some modicum of public trust. After all the hardship Greece has endured, the roughly 2 percent a year growth the Bloomberg consensus forecast promises the country in 2018, 2019 and 2020 is painfully insufficient. But how does one stimulate growth while forced to maintain large primary surpluses and only borrow at rates that can make Greece’s debt look unmanageable again by the end of the electoral cycle in 2023?
Ironically, New Democracy, which lost power to Syriza in 2015 because Tsipras promised an end to austerity and a debt write-off, is now in Syriza’s position, bemoaning Tsipras’s inability to reduce the face value of the debt and Greece’s lack of leverage in speeding up economic growth. If it tries to run up Greece’s private debt to spur investment, it may get slapped on the wrist or create a new debt crisis for the next four-year parliamentary period.
The heavy-handed bailouts may have helped keep Greece running and in the euro zone, but, just as their critics have claimed, they have rendered the Greek democracy somewhat redundant. Officially out of the bailout program, Greece still cannot really make its own policy. It may be doomed to a cycle of protest votes, weak governments, and, unless these governments are prudent, debt crises. Breaking that cycle might just be a goal that would justify allowing some moral hazard; it’s just hard to imagine the creditors trusting Greece again enough to loosen the leash.
©2018 Bloomberg L.P.