Key players doubt Greek rescue plan has a chance

A vendor tries to sell items at a street market near Athens.

Aug. 2, 2015 9:40 PM PT

reporting from LONDON — Greece’s own prime minister says he doesn’t really “believe in” the new bailout deal he’s hoping to secure for his country.

Germany’s top finance official thinks a Greek exit from the euro currency would be better than another costly rescue package.

The International Monetary Fund doubts a bailout will work without major debt relief from Athens’ creditors, few of which appear willing to offer any.

To hear these key players tell it, the rescue plan they’re currently concocting to save Greece from bankruptcy is either a bad idea or doomed to fail. Yet they’re pressing ahead anyway, despite the questions that their own public statements raise about their commitment to keeping Greece solvent, helping its economy grow and preserving its membership in the Eurozone.

Senior European officials, particularly from Germany, say this is Greece’s last chance to get its financial and economic house in order with the aid of its 18 fellow nations in the euro currency union. The government in Athens is hoping for a new, nearly $100-billion bailout — its third in five years — to tide it over until late 2018.

But pessimism is widespread over the viability of yet another cash-for-reforms package incorporating some of the same elements that already failed spectacularly in two previous rescue programs. These include fresh austerity and privatization measures that the ruling left-wing Syriza party vowed never to accept until its leader, Prime Minister Alexis Tsipras, yielded to creditors’ demands during white-knuckle negotiations last month.

“This was literally a last-ditch situation where the government gave in only because they felt there was no choice, like someone doing a forced confession on television in order to get out of jail,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington.

Since capitulating to lenders’ demands, Tsipras has repeatedly declared that he does not agree with the policies he is being forced to enact and that he acceded to them only to stave off the worse result of Greece’s expulsion from the Eurozone. In addition to further cuts in public spending, Athens has been ordered to reduce pensions, liberalize the labor market and sell off billions of dollars in state assets.

But his comments, along with those by the IMF and by powerful German Finance Minister Wolfgang Schaeuble, have given rise to a potentially risky situation in which the main actors in Greece’s debt drama are practically disavowing the path they’ve all agreed to pursue. Negotiations on a new bailout began in earnest in Athens last week and will probably last through mid-August at least.

“Of course they don’t believe in it, and it can’t work,” said Weisbrot, a fierce critic of Europe’s attempts to solve the Greek debt crisis mainly through punishing austerity cuts. “The arithmetic is pretty plain. It’s not going to allow the economy to recover, and people are not going to endure more years of depression.”

Many economists agree that multiple rounds of budget cuts and tax rises have been disastrous for the Greek economy, which has contracted by 25% — the worst in peacetime of any developed nation since the Great Depression.

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The new bailout under discussion is expected to follow the same recipe. To even get the other Eurozone nations to the bargaining table, Tsipras’ government had to rush through Parliament a raft of bills reforming pension benefits and hiking taxes on goods and services, including some affecting Greece’s all-important tourist industry.

In pre-bailout talks, Tsipras agreed that Athens would run a budget surplus, excluding debt payments, of up to 3.5%. That will require yet more belt-tightening by many Greeks who feel there are no more notches left.

“Here is a prime minister pushing for measures he knows and says aren’t going to work — not only not going to work but [are] bad for the economy,” said Vicky Pryce, a British economist who was born and raised in Greece. “When the economy is collapsing, you don’t raise taxes.”

Pryce warned that public unrest was likely, adding that, if the economy had shrunk by 25% in any other European country, “the politicians would have been lynched.”

The question of just how far to push Greece is a tricky one. Led by Germany, which has lent Athens the most money and adopted the toughest line, a number of Eurozone countries are demanding more upfront legislation and proof of reform before any bailout loans are doled out.

Yet that risks provoking Tsipras to distance himself even further from the rescue plan and to shirk implementation of its requirements. It could also aggravate his problems with the far-left faction of his Syriza party, which is in open revolt against the prospective bailout and advocates a return to the drachma, Greece’s former currency.

Much as some European officials privately express their distrust of Tsipras, he remains Greece’s most popular politician, with the best chance of enacting the changes they want to see.

“The critical question is, are the creditors going to see the Greek situation in a rational way and recognize that Tsipras is the most critical political actor in Greece?” said Mujtaba Rahman, chief European analyst for the Eurasia Group, a risk consultancy. “Better from the creditors’ perspective to work with Tsipras [and] conclude the program with him.”

The most pointed skepticism of another bailout has come from Schaeuble, the German finance minister, who is on record saying that a temporary “timeout” for Greece from the euro would in many ways be preferable to a new rescue package.

As popular for taking a hard line on Athens as Tsipras is for resisting it, Schaeuble has been overruled for now by his boss, German Chancellor Angela Merkel, who worries that ejecting Athens from the Eurozone would damage the credibility of the euro and the project of greater European integration.

But she has followed her finance chief’s lead in insisting on a bailout provision that most analysts dismiss as sheer fantasy: the establishment of a trust fund responsible for selling off Greek state assets and generating about $55 billion for the public purse, half of which would go toward paying down Athens’ debt. The unspecified assets could include utilities, airports or whole islands.

The idea of a big public sell-off was enshrined in both of Greece’s previous rescue programs — and failed. Only a fraction of the projected amount was raised. Hardly anyone expects much more.

“The market is depressed, and who wants to buy Greek assets anyway?” said Manos Matsaganis, an economist at Athens University of Economics and Business.

He and others believe that the provision is mostly political cover for Merkel to be able to convince unhappy German lawmakers to back a new bailout, giving them hope that Greece will rake in enough money to help pay back its loans.

“These things look like pure fiction, but they had to be there, because otherwise they wouldn’t be approved by the German Parliament,” said Matsaganis.

He also questions whether Tsipras’ administration will follow through on its promised reforms, some of which even previous governments more amenable to European demands failed to implement.

Some analysts fear a return to what happened repeatedly under the first two rescue plans, where Athens would drag its feet on reforms, bailout monitors would threaten to cut off further loan installments and the specter of default would rattle markets yet again.

Nonetheless, Pryce said it’s important for European leaders to go ahead and seal a bailout deal; Greece has large debt repayments due Aug. 20.

After that, adjustments can be made, including potential relief for Athens from its crushing pile of debt, which equals about 170% of the country’s gross domestic product. Tsipras has touted the prospect of debt relief as his chief negotiating victory with his European partners.

“There is an expectation that once everything is signed … then we could see some more laxity coming in the requirements, so that this can actually look like a success this time,” Pryce said.

“Greece definitely needs to reform. It’s too closed, too bureaucratic,” she added. But “you can’t change Greece overnight after this long period of clientelism and bad management of the economy.”

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