Greek deal is probably undeliverable, warns Pimco

Finally, after what must have been some of the most painful arm twisting in history, in a historic late night sitting, with the policemen outside the Greek Parliament dodging the flames from Molatov cocktails thrown by seriously angry protestors, the Greek austerity deal got done. And agreement on the additional $320 million of austerity measures demanded by the EU, the IMF and the European Cental bank, the so called “troika”, came in the nick of time, just within the deadline of 15th February set by the EU.

However, there is widespread scepticism amongst both investors and the media that the deal is actually deliverable in the teeth of massive public anger. Mohamed El-Erian, the chief executive of Pimco, the world’s largest bond fund, writing in the Financial Times calls the deal “courageous and ambitious”, incorporating as it does, yet “more painful austerity measures, substantial official financing, and debt relief from private creditors.” However, he warns that a process that could only be put together by hammering highly reluctant coalition partners, under immense pressure, into a temporary and highly fragile union, cannot be seen as something that is likely to endure.

The Greek public hate the idea of yet more austerity. Although the German media love to portray the Greeks as grasping and lazy, the ordinary Greeks regard themselves as having had very little to do with the run up of ruinous debt. Greek private debt levels are way lower than US or UK levels of private debt. If they were to blame it is only in the sense of having voted in successive Governments who promised – and delivered – more by way of social benefits than the Greek economy could possibly pay for.

The real money which flowed into Greece as cheap credit on the back of its membership of the euro, was made by the Greek oligarch families, most of whom have already shipped their money out of Greece and who continue to pay almost no tax, thus exacerbating Greece’s public debt.

El-Erian argues that there are good reasons why the present deal is likely to unravel within a few months. First, as he points out, what is plainly visible to the Greeks, politicians and citizens alike, is that taking on more pain does not result in any visible solution to their economic problems.  As El-Erian puts it:

“(…) successive Greek governments have been forced into several rounds of austerity measures in the past two years – yet still every meaningful indicator of Greece’s economic and financial state has worsened.”

Taking pain for some visible gain is doable. Taking pain for pain’s sake, because the Germans feel like punishing you for running up debt buying their goods, is not doable.

Second, El-Erian points out that the only real, visible result of all the money that Greece’s official creditors have poured into the country over the last year, is that “it has enabled some private creditors to redeem at maturity their investments with no principal losses”. All that cash has done next to nothing to improve Greece’s long term prospects, he says.

Moreover, as every economist with even a tiny Keynesian bent is quick to point out, it is economically impossible for Greece – deprived of any monetary policy tools, since these are in the hands of the ECB – to save its way out of its present predicament. The more Greek citizens hang onto their euros, the more moribund the Greek economy becomes and the less able the Greek government becomes to meet its debt. Austerity is a path to endless pain, not to an improvement in Greek finances. The Greek balance of payments will continue to worsen each year, with the Government becoming yet more indebted, and still more unable to meet even the interest on those debts.

Another key point for El-Erian is that, as he notes:

“None of the interested parties has enough overall responsibility for the adjustment programme. This is likely to prove a problem yet again. The history of debt crises suggests that a lack of “ownership” translates into a lack of conviction.”

By “interested parties” El-Erian means both the Greek government, fragmented as it is, and the “troika”, as well as those negotiating with the Greek government on behalf of private creditors. They are all at sixes and sevens, with no real coherence amongst themselves. France wants the ECB to monetise the debt or to back eurobonds. Merkel won’t hear of it. The ECB thinks its mission is to fight inflation, not print euros. The hedge funds would rather see a default by Greece since that would trigger CDS payouts instead of massive haircuts on their holdings. Greek politicians fear for their seats in Parliament if they keep on down the austerity road. And so it goes on.

Small wonder then that El-Erian is warning that all the parties involved are highly likely to find themselves back at the negotiating table trying to patch yet another deal together before any of them are much older.

Further reading on the European sovereign debt crisis:

This article was written by Anthony Harrington and originally published on QFINANCE

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