Greek bailout deal is a classic fudge – but should work for now

Posted by Larry Elliott, economics editor Tuesday 27 November 2012 09.00 GMT guardian.co.uk

Greece now looks to have the finance to keep it solvent until 2014. It will stay in the euro, at least for now

Managing Director of the International Monetary Fund (IMF) Christine Lagarde arrives for Eurozone finance ministers meeting in Brussels, capital of Belgium on Nov. 26, 2012. Photograph: Wu Wei/xh/Xinhua Press/Corbis

There was something for everyone in the latest Greek debt deal. Athens gets enough money to stop the country going bust, Angela Merkel has done enough to keep Greece in the euro until after next year's German elections. The European Central Bank has fended off calls for it to take a haircut on its holdings of Greek bonds. Last but not least, the International Monetary Fund has forced Europe to get real about Greek's unsustainable debt position.

If all that sounds a bit too good to be true then that's because it is. This was a classic late-night serving from the Brussels fudge factory and it will certainly not be the last time Europe's finance ministers spend long hours discussing Greece.

Let's start with the good things about the plan. Firstly, the meeting in Brussels accepted that something had to be done – and fast – to prevent Greece running out of money. Next month will see the latest tranche of bailout money – €23.8bn for starters – handed over, just in the nick of time.

Secondly, there has been an acceptance that Greece needs additional help to make its debt sustainable. The IMF has been making the point that Greece is going through an immense amount of pain for no purpose, since tax increases and spending cuts to reduce the budget deficit are being outweighed by the revenue loss from a country five years into a brutal depression.

European policymakers, after some resistance, have now agreed that there should be a strategy for getting Greek debt down to 124% of GDP by 2020 – almost but not quite the 120% of GDP the IMF was calling for, and substantially below 110% of GDP in 2022.

A number of measures have been proposed for achieving this objective. Greece could see the interest rate on its borrowings reduced by 100 basis points (a full percentage point). It could pay a smaller guarantee fee on its loans. It could benefit from extra time to pay back its debts. European countries could agree to return any profits they make on their holdings of Greek debt back to Athens.

The key word here, of course, is "could". Monday night's deal was conditional on Greece sticking to its austerity programme in full and the debt-relief plan will only be implemented gradually to ensure there is no backsliding. The coalition government in Athens, given the economic and political pressures it is under, will find it tough to stick to these conditions.

Most worryingly of all, the package does nothing to address Greece's fundamental problem: the lack of growth. Past plans to make the country's debts sustainable have foundered because a far too rosy view has been taken of Greece's ability to cope with the austerity demanded by its creditors. This plan is no different.

In the short run, this deal should do the trick. Greece looks to have the finance to keep it solvent until 2014. It will stay in the euro, at least for now. The Germans can say that they have not given an inch. Investors, relieved that the uncertainty is over, will probably push the single currency higher on the foreign exchanges.

But Greece's economic agony will go on. The financial package is enough for the government to pay its bills but not enough to end the recession and start reducing unemployment from 25%. As growth falters, the debt position will not improve as quickly as Greece's eurozone partners anticipate. And there will be more burning of the midnight oil in Brussels.

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