Light at the end of the tunnel? Not yet...

Update 10 February, 9:45 am

Greece's letter of intent (29 pages including the annexes) with all the envisaged austerity measures is available here



After countless missed deadlines, numerous strikes and some very exasperated European officials it seems there is an agreement in Greece. Finally.

Despite the failure to achieve one overnight, an agreement had been coming given that only one point of disagreement remained – on pension reform. The Greek political parties refused to cut primary or supplementary pensions further, leaving a €300m gap in the Greek budget – pretty small given the huge sums at play in the Greek deal.

The statement just released by the Greek PM is minimalist to say the least - only two sentences. It confirms that a deal has been reached and suggests the total bailout size will be €130bn.

So what does this deal mean?

Well, it is positive in that it moves the whole Greek discussed forward one large step, but it isn’t the end of it – not by a long way. Essentially, the Greek unity government has now agreed and committed to a new programme of austerity, just one part of the wider Greek package and in itself not necessarily productive. As we have flagged up elsewhere austerity alone cannot and will not solve the Greek problem and could be on the verge of becoming counterproductive given the economic (low growth) and political (civil unrest) implications.

It also allows a deal to be presented at this afternoon’s meeting of eurozone finance ministers, allowing progress on some of the other remaining questions, which include:

- What structure will the bailout take (in terms of allocation of funds and distribution of payments)?
- What will the total level of debt reduction from the restructuring be?
- When will the restructuring begin and will it be in time to pay off the €14.4bn in debt maturing on 20 March?
- Will the European and Greek parliaments approve all aspects of the deal?
- What role is the ECB playing? Will it submit its holdings of Greek debt for restructuring?

This afternoon’s press conference with ECB President Mario Draghi was fairly cryptic on this last point, with Draghi trying to dodge questions about the ECB and Greece for the most part – although he did drop a couple of hints.

Our take is that the ECB may, very reluctantly, take some part in the Greek restructuring. It will not take any losses and is hesitant to transfer its bonds to the EFSF, the eurozone bailout fund, even at cost price. One possible outcome could be that the ECB will distribute the potential €15bn in profits from its holdings of Greek debt to the eurozone countries (since they are the ECB’s backers and already share in its profits) to be put to use in funding Greece. How this can be done upfront, especially without using the EFSF, remains to be seen.

Additionally, the fact that the Greek PM’s statement specified the bailout amount as €130bn suggests that there will still be a budget gap in Greece which needs to be filled, even with the agreement on the additional austerity. An ECB contribution seems to be the only remaining viable way to close this gap then.

So, we are eventually one step closer to another bailout of Greece. The end to the uncertainty is positive, but in the long term it seems to be just another step along the wrong path.