Article / 25 May 2016 at 15:00 GMT

The Eurozone's Greek solution? More delays

Managing Partner / Spotlight Group
United Kingdom
  • Eurozone finance ministers agree to Greek debt deal
  • Many questions regarding reforms remain unanswered
  • Refugee crisis adds a new element to long-simmering issue


The Eurozone has agreed to yet another Greek plan, but the country's 
overall situation essentially remains as precarious as ever. Photo: iStock

By Stephen Pope

After six years of confrontation, cutbacks and economic collapse, there was a mounting level of concern that this summer would herald a new dawn of crisis in Greece. The southeastern tip of the Eurozone would be shaken once again by economic collapse and political protest. Therefore, in a series of meetings that have spanned the globe, policymakers from the troika have hatched a deal that aims to ease the Greek debt burden.

An agreement was announced early this morning whereby Greece has been granted a new commitment of debt relief. This, however, is not going to happen immediately – the new commitment will not become a reality until 2018 (if then).

Of course, this is not "money for nothing". Greece will still be expected to institute far-reaching and most likely painful reforms. Ultimately, however, it appears that this agreement is really just another example of the Eurozon kicking the can down the road so that it becomes a problem for another day.

The circulation of money

In a bizarre monetary merry-go-round, Eurozone finance ministers have approved a new round of aid payments to Greece so that the debt-ridden nation can pay its bills in the coming months. Subject to final approval, Greece will receive an additional €10.3 billion, distributed in several stages. The first amount will be for €7.5bn during the second half of June.

Greece has played its hand skilfully, and has managed to divide the opinion among its main creditors – i.e. it has achieved its goal of new funding by dividing and conquering opposition to new cash and the prospect of debt relief. 

The last few weeks have seen the creditors engage in a busy rush of global "shuttle diplomacy" culminating in long-lasting talks from Tuesday afternoon into early Wednesday over how many concessions Greece should be given.

Officials sought to show they could find an accommodation between Greece’s creditors over the debt relief plan details as well as the state of the country’s economy as a whole.

Opposing views

From one end of the creditor dialogue came the International Monetary Fund, which maintains that the Greek nation has no chance of meeting its budget targets. The IMF has taken the stance that it cannot fund countries with unmanageable debt loads. Therefore, Greece needs some relief from its outstanding debt burden (currently 177% of GDP).

From Europe's heart, Germany has continually remained opposed to any further accommodation for the Greeks. They have also pointed out that Athens is running a deficit of 7.2% of GDP – up from 3.6% of GDP in 2014. 

The German contingent have also suggested that Greece is politically unstable and that in the event of an early election, a change of government – most likely with a slim majority at best –might not be prepared to implement the required policy alterations later in exchange for debt relief now.

Wolfgang Schauble
German finance minister Wolfgang Schäuble. Photo: iStock

Creditor compromise or financial fudge?

Poul M. Thomsen, the director of the IMF’s European department, told a news conference early this morning that "we had argued that these debt relief measures should be approved up front, and we have agreed that they will be approved at the end of the programme period. …”

He added that the steps taken by Greece and the debt-relief plans outlined by European lenders should form the basis for IMF support. In addition, he added that the IMF would have to carry out another analysis of the Greek economy before joining the bailout.

The financial fudge is to be seen in the discussions of a debt swap that requires Europe to buy a portion of the IMF loans made to Greece and then allow Greece to borrow more money at a lower rate.

I am all for a creditworthy borrower with access to the capital markets tapping new, cheaper funds to redeem older, costlier debt. Greece, however, is not able to access the markets with ease and so why is it given such accommodation? Especially when governments of all hues since 2010 have not delivered the required pace of privatisation or reform? 

Once again, the Greek tail is wagging the Eurozone dog.

Thomsen said there was no firm proposal re debt swaps or a buyout, however, he suggested that such a step would be helpful. 

Would it? Well, it would possibly be helpful to Greece, but this kind of endless accommodation will never get Athens in line. In the end, it's just another emergency patch on the tattered fabric of the Eurozone.

What scale of debt relief? 

Now the question to ask is just what level of accommodation or debt relief is Greece to be given? The Greek nation is carrying over €300bn in debt and yet instead of maintaining a hard line in 2010 when the Greek sovereign debt crisis blew up, the authorities have done everything to stop one nation leaving the Eurozone for fear that the markets may then test Spain or Italy's membership.

I was and still am of a view that Greece should have been educated as to the ramifications of non-compliance with the Eurozone’s terms and conditions; they should have received a “sovereign winding-up petition”. Of course, that has not happened and Greece continues to be accommodated. 

This cannot sit will across the Eurozone given that Ireland, Portugal and even Spain all have followed the conditions they accepted in exchange for funding.

I am with the Germans on this. As finance minister, Wolfgang Schäuble insisted at the IMF meetings in Washington, such accommodation will only distract Greece from taking steps to transform its economy.

So enough of what should be… let’s take a look at what is.

Jeroen Dijsselbloem, the Dutch politician leading the Eurogroup, has brokered a compromise between Germany and the IMF. He has he proposed a three-stage plan:

  • Short-term: Athens receives funds to reduce its debt and payment terms are adjusted.
  • Medium-term: Greece would receive longer grace and payment periods.
  • Long-term: There could be more far-reaching, though unspecified, measures.

There are problems with this plan in that it allows Greece to tap profits on its bonds that were made by the European Central Bank and Eurozone national central banks. The bonds, bought at fire-sale prices in the depths of the crisis, have since gone up in value, and the profits would give Greece a bit more leeway in the next two to three years.

This was ridiculous as a proposition. The Greeks had the benefit of their debt being shored up at a time of crisis by the ECB etc. buying it in the first place. So should they then seize the profits as well? No wonder Schäuble says it would prove difficult to get German lawmakers to approve the move. He suggested this not be an option until after 2018. 

No, mein herr…it should not be an option at all!

In true Eurozone style, the plan has been redrafted, but the IMF has proposed that Greek interest payments to the Eurozone be fixed at 1.5% for up to 40 years.

This was unacceptable to Germany at first and I do not blame them. I am sure the Germans will feel that they have been bullied by the IMF, the G7 and especially the Americans as US Treasury secretary Jacob J. Lew urged Schäuble to put Greece’s debt on a sustainable path through meaningful debt relief as a means of preserving stability in Europe.

Washington, D.C.
Washington appears to be applying some pressure of its own. Photo: iStock

Uncertainty prevails

With regard to the short-term aspect of the debt relief plans that emerged Wednesday morning, Dijsselbloem told a news conference that "it’s difficult now to say what in economic terms the impact of that will be".

He suggested that the debt relief measures slated to start in 2018 could be far-reaching and as for the Eurogroup, he outlined those so-called medium-term plans in much greater detail than earlier in the month.

…Some may say, I have heard it twice now, that the package is not ambitious… but what the Eurogroup has put on the table here for short-term and medium-term debt relief is something that a month ago I couldn’t have dreamed that the ministers would have agreed to…

What about the long-term?

What I want to know is, what about the third leg of the agreement? What are the more far-reaching, though unspecified, measures?

Where are the discussions about what Greece will do in terms of further privatisation? This has been the most aggravating issue for the creditors as Greece has simply dragged its feet on this matter for the past six years.

Privatisation of public companies contributes to the reduction of public debt. It releases the state from paying subsidies, other transfers or state guarantees to state-owned enterprises. It is a key catalyst for increasing the efficiency of companies and the competitiveness of the economy as a whole, while attracting foreign direct investment.

It helps countries pay back their debt, improves efficiency and effectiveness, and therefore would boost economic growth. 

This idea is often challenged by the left and one favoured argument is that sales of state-owned assets during recession have consistently failed to raise expected revenues.

It was Greece that predicted it could raise €50bn but has so far raised a paltry €3.5bn. This is not just a result of selling at a time of recession, but also comes down to the fact that Athens delayed the process of privatisation for too long and was eventually seen as a distressed seller. 

An asset is only worth what a buyer will pay, not what a seller would like.

Greece has simply wasted time, opportunity and money just as the troika are showing their plan for what it is worth. The Greeks will never repay their debt, nor will the economy be reformed…but the Eurozone will pick up the tab as a price worth paying. 

The 2010 plan to preserve the Eurozone as a financial "lobster pot" with no exit has now morphed into something very different. The scheme now being hatched is to use Greece as a useful defence for the ”not in my backyard” Europeans against the thousands of helpless refugees.

Refugees on the Greek island of Kos, 2015. Photo: iStock

— Edited by Michael McKenna and Clare MacCarthay

 Stephen Pope is managing partner at Spotlight Ideas

25 May
okancakmak okancakmak
Thanks a lot for great article. Our gold strategy has done its duty. What do you think about USDJPY and GBPUSD?
25 May
Stephen Pope Stephen Pope
USDJPY: The technical picture is muddled and we have USDJPY in a fine looking corrective since February but I have to favour the Dollar at the moment as the BOJ will hold the line on generous monetary accommodation whereas the Fed will make a move in July...I still think June is too early.
Key for USD upside is breaking 110.55 if so then there is scope for 112.45 seen on Feb 29.

GBPUSD: This pair inhabits a long corrective dating back to mid 2014. The short-term out to a month is quite patchy and I would not expect much more than a hard push ahead for the Dollar over the first two weeks ahead ...but then the UK EU referendum becomes very much in focus and then I would be away from GBP as the vote is going to be close in the polls or at least in the margin of error. Targets are 1.5096 and 1.5526.



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