Viewpoint: The second bailout plan for Greece, as was also the case with the first, is mostly designed to gain time.

This is not a bad thing…..

For professional investors and advisers only

The Eurogroup has made further progress towards the granting of a second bailout to Greece, which unlike the first programme, will see the IMF make a relatively marginal contribution. However, it should be stressed that not all the problems have been resolved. First of all, the go-ahead and the definition of the financial commitment are conditioned to the swap offer meeting with sufficient private sector participation, which should in any case be aided by the retroactive introduction, by law, of collective action clauses. The swap will be completed on 12 March, but already on 1st March creditors should be able to clear lingering doubts on the size of European financing. Second: in the days ahead, Greek legislators will have to approve other measures required by creditors as necessary conditions, and the government is called to implement a series of actions listed in the Memorandum adopted by parliament. The risk, in this case, does not lie in the willingness to meet conditions, but in the technical capability of implement the agenda in such a short time.

There is no doubt that the second package represents only a temporary contribution to solving the Greek crisis: even in the best case scenarios, new loans will be inevitable as of 2015. Also, official creditors are well aware that even the adequacy of resources with respect to financial requirements over the three-year period will depend on a fortunate combination of events, and that their credits are also at risk of being restructured in the future. The calmwater horizon will essentially be limited to the three months in which cover is guaranteed by the escrow account. Therefore, commentators who claim that this is only a way to gain time, and that this package is marred by the same inherent defects as the first, are in the right. In any case, better to gain time than to run the risk of immediately starting to question the progress made in recent times.

The time won will allow other countries to consolidate. The truth of the matter is that, despite the tightening of peripheral country spreads observed since mid-December, there are still risks on the horizon. Italy must still prove it is capable of implementing the more delicate structural reforms, such as the labour market reform, and that improving national accounts and the gradual nearing of 2012 targets will not be compromised by a sharper contraction in GDP (between 0.6% and 1.1% deeper than forecast in December). Spain and France, which have hitherto hidden behind excessive growth estimates, will have to make their voters accept a revision of 2012 fiscal objectives and new austerity measures, a challenge which for France comes in a phase of high political uncertainty and in the run-up to a probable change in government. Portugal and Ireland, which for the time being need not worry about tapping the market, may concentrate on reaching the targets laid out in recue programmes, attempting to remove speculation on the possibility of their debt also being restructured. Lastly, the hope is that the interbank markets will also gradually start functioning again, following the flooding of the market with liquidity in recent months and the drop in risk premiums weighing on sovereign issuers.

An interesting side-development of negotiations was the strong pressure exercised by the IMF, the United States, the United Kingdom, and Japan, to raise the ceiling on the intervention capacity of the EFSF and ESM as a precondition for the strong involvement of the Fund in the recue programmes. The Eurogroup has agreed to discuss this at its March meeting. Germany has become increasingly isolated in its opposition to the move: even the Dutch Minister of Finance is now convinced that enhanced firepower would be useful, as his statements of 23 February made clear.


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