What a week to be Greek—or Spanish, or Portuguese. The debt-swap deal that most of Greece’s private creditors accepted last Thursday evening is of historic importance. Greeks now have at least a fighting chance of digging themselves out of debt and getting on with life. But the Greeks, the Spanish, the Portuguese, and who knows whom else are now on the European Union’s fiscal hook, and it has a nasty barb on it.
The deal Athens struck with its private creditors looked like a pipedream to most of us just a couple of months ago. About 85 percent of private-sector lenders agreed to accept a bond swap in which new bonds they receive will be worth about 25 percent of the value of the bonds they surrender. Before this finishes, that percentage will rise to 90-odd percent. This will include the major U.S. banks, which hold about $80 billion in Greek bonds, roughly $30 billion of which is insured, leaving them with a net exposure of about $50 billion. But the real U.S. exposure is more broadly based: It is to the European economies as a whole and its wobbly banks in particular.
With last week's deal, Greece will have cut $132 billion from the $272 billion in sovereign debt held by the private sector. That will save Athens about $20 billion in interest and principal payments per year. In addition, it can look forward to the EU and the International Monetary Fund signing off as early as this week on a rescue package worth $171 billion, which Greece needs immediately—as in right now—if it is to avoid a default on a portion of its remaining debt.
No Free Greek Lunch
What’s not to like, then? Getting to this position required EU members to accept radically intrusive conditions imposed by Brussels. These include restrictions on national budget deficits and—perhaps more humiliating than anything else—supervision by EU teams when the fiscal horizon looks cloudy.
The Spanish and the Portuguese are not amused, to put it mildly. Mariano Rajoy Spain’s prime minister, has already rather testily advised the EU that Madrid will miss its budget target as designated by the EU’s new fiscal pact. Last year Spain’s deficit came in at 8.5 percent of GDP; the target was 6 percent.
Most of Greece’s remaining debt, $343 billion, is held by international and sovereign lenders—the IMF the European Central Bank, and individual EU members. And when the time comes for Greece’s next debt restructuring—which is expected as early as next year—there will be no swapping down with these institutions and neighboring central banks: They do not take haircuts.
As I read this, the Greek deal is going to turn out to be do-or-die time for the economic strategy Western Europe has found fashionable these past several years: savage austerity that is unmitigated by job-creating, growth-generating stimulus of any kind. This puts Mariano Rajoy’s apparent impudence into context: Spain is now nursing an unemployment rate of nearly 23 percent.
Due this Spring: Elections in Greece
It makes you wonder about the political jockeying already starting in Athens, where national elections are due this spring—perhaps as early as the end of April. This weekend, Finance Minister Evangelos Venizelos, who has been a key figure in negotiating Greece’s new deal with creditors, formally announced his candidacy as leader of the Socialist Party. “There is now more than just recession, budget cuts, and tax increases,” Venizelos told a party conference. “There’s the hope to turn the wheel of growth.”
What is Venizelos talking about? How would he stimulate growth when Greece’s debt is still ridiculously above its target ratio: The target is 120 percent; this year it will land at 151 percent and next year 149 percent.
I am for a Greek government that is given the room to stimulate the national economy, and at the moment there is no such room. News reports of Venizelos’s appearance said an old man on crutches threw a container of yogurt at him before he spoke. I stand with the yogurt hurler if Venizelos is simply politicking.
The Greek deal is a triumph for European technocrats—no less but no more. Now Europe needs a political victory of similar magnitude. Christine Lagarde, the I.M.F.’s managing director, and German Chancellor Angela Merkel have already set the tone in their frequent exchanges.
Lagarde favors pro-growth spending in northern Europe to help the down-and-almost-out economies in the south get on a growth track. That is the kind of conversation Europe needs now. And politically ambitious men such as Evangelos Venizelos, along with prime ministers such as Spain’s Mariano Rajoy, should be part of it.