After protracted negotiations, Greece’s prime minister announced on Thursday an agreement on a new adjustment program. By all indications, it is a courageous and ambitious deal, incorporating more painful austerity measures, substantial official financing, and debt relief from private creditors. Yet the process that has led to this juncture is worrying. There is an uncomfortably high chance that this agreement will have the same fate as previous ones – unravelling within a few months, and for good reasons.
Greece’s seemingly endless negotiations stem from two factors that threaten to derail the deal long before any of its durable benefits materialise. First, it is never easy to reach agreement among parties that have very different perceptions of both the problem and its solution. This is especially true in Greece where all three parties to the negotiations (the government, official creditors and private creditors) feel they have already been asked to do a lot, without seeing any actual or potential reward for their sacrifices.
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. This sad reality is also relative to what was anticipated in the recent series of adjustment programs.
In this period, official creditors have poured money into the country. In the process, eurozone politicians have faced considerable domestic opposition – including, of course, in Germany. They have also risked the integrity and credibility of the European Central Bank and International Monetary Fund.
Yet all this official financing has done little to improve Greece’s long-term prospects and, rather than attracting new private financing, it has enabled some private creditors to redeem at maturity their investments with no principal losses. Meanwhile, those that still have Greek bonds complain that every time they have agreed to a 'haircut', starting with 21 per cent last October, other parties have moved the goalposts.
The second factor complicating the process is that none of the interested parties has enough overall responsibility for the adjustment program. 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. As a result, principals – be they government leaders, the ECB and IMF, or those negotiating on behalf of private creditors – find it difficult to sell the agreement to constituents. No wonder agreements have often unravelled after they have been presented to the many groups that have to implement them.
Weak 'ownership' also undermines the many corrections that are needed over the course of an adjustment program. Only pure genius or enormous luck could produce a perfectly designed Greek program. It is almost inevitable, given the fluidity of the situation in Greece and the global economy, that whatever is agreed will need tweaking in the implementation stage. Without conviction, these corrections will be an opportunity to exit an imperfect agreement rather than to adapt and improve it.
I suspect all three parties to the negotiations know in their heart that their latest agreement, brave as it is, will only last a few months at best. Yet no one wants to be seen to be responsible for a change in course at this stage, fearing they could be blamed for a disorderly default and a potential exit from the eurozone.
So, while welcoming the latest agreement on Greece, we should recognise that, regrettably, it stands only a small chance of placing the country on the path to high growth, higher employment and financial stability.
Based on available information, it appears to do too little to promote growth, still leaves the country with an excessive medium-term debt burden, and is unlikely to attract the new external inflows needed for investments in productive and job-creating sectors.
What Greece needs, of course, is an economic, financial and institutional overhaul. Such a reset is not easy; it is also risky. But until it happens, repeated rounds of negotiations will be the rule – as will derailed agreements and finger-pointing.
I fear that this deal is not the end. Within a few months, the negotiating parties are likely to be back at the table bickering while Greece continues to stare into the abyss.
Mohamed El-Erian is the chief executive and co-chief investment officer of Pimco.
Copyright The Financial Times Limited 2012.