Beware of ECBs bearing gifts

Stratfor:

Greece and its lenders reached a temporary deal late Feb. 20. The agreement was carefully crafted to make both Athens and the reluctant governments of Northern Europe happy, but it comes at the price of postponing a resolution of the crucial issues. As a result, a “Grexit” from the eurozone will be deferred in the immediate term, but the crisis is far from over.

Greece and the Eurogroup agreed to extend Athens’ bailout program for four months. The agreement keeps Greece under the protective umbrella of the European Central Bank, the European Union and the International Monetary Fund. The ECB will continue to provide liquidity for Greek banks, while the European Union and the IMF will make funds available should Greece need them.

However, this deal has left many questions unanswered. First, Greece promised to present a list of economic reforms — probably focused on cracking down on tax evasion and corruption and reforming Greece’s public administration — by Feb. 23. This list will be further detailed and then agreed upon with the European Union and the IMF by the end of April. In order for Greece to receive the next tranche of the bailout, the European Union and the IMF will have to accept these proposals. (This is probably the part of the deal that made the agreement acceptable for Germany.) Still, the key source of conflict between Athens and Berlin — the specific reforms that Greece will apply in exchange for the bailout money — has only been postponed.

Second, the size of Greece’s primary surplus was also omitted in the agreement. The European Union and the IMF promised Greece to take its economic situation into account when setting a deficit target, a small victory for Athens. This issue will also become problematic again in April, when Athens is supposed to present the exact details of what it plans to do.

In the coming days, Greek Prime Minister Alexis Tsipras will have to sell the deal to the most radical members of his left-wing Coalition

Alan Greenspan: “I believe they will eventually leave. I don’t think it helps them or the rest of the eurozone — it is just a matter of time before everyone recognises that parting is the best strategy. The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated — actually even just fiscally integrated won’t do it.” He’s right of course; it’s just a matter of time. It will be interesting to see if Tsipras can sell this mini-deal at home.

BTW, a decade ago we thought the euro was likely to fail; our reasoning was what is playing out now.

One Response to “Beware of ECBs bearing gifts”

  1. Steven Den Beste Says:

    I think the main thing everyone is trying to avoid is a run on Greek banks.

    I’m not going to say that a Greek exit from the Euro cannot happen, but it’s virtually guaranteed that it would cause a run on Greece’s banks, and there wouldn’t be any ECB to step in and provide emergency loans to tide them over. As a result, if Greece goes back to the Drachma, it would collapse almost immediately due to capital flight.

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