Greece sorta defaulted last night. That's what you need to remember when reading of Greek Prime Minister Lucas Papademos's ‘happiness’ at the €130 billion deal reached by eurozone finance ministers in the early hours. Sure, the country will now be able to pay off its creditors when various loans mature on 20 March. But the concurrent ‘voluntary’ haircut of 53.5 per cent for private bondholders will still be seen as a ‘restricted default’ by credit rating agencies. And it could feasibly get worse if those private bondholders decide not to play along and instead trigger a credit event, either manageable or messy.
The question hovering over Greece is now, really, whether it can slowly contain its debts, or whether it's still heading for a default proper. The document released by bleary-eyed finance ministers this morning is predictably bullish. ‘The respective contributions from the private and the official sector,’ it reads, ‘should ensure that Greece's public debt ratio is brought on a downward path reaching 120.5% of GDP by 2020.’ Of course, this means more austerity for the Greek people — and all overseen by a bigger, tougher and busier group of eurocrats in Athens.
But CoffeeHousers should remain sceptical, ever sceptical. For starters, a debt/GDP ratio of 120 per cent is hardly some magic level at which everything gets better, particularly for an economy as screwed as Greece's. And that's assuming that the ratio is reached anyway. As ZeroHedge points out, the eurozone's official forecasts for the intervening period have a touch of mad optimism about them. The next eight years could — probably will — be a lot worse than Brussels is letting on, both economically and politically.
In which case, it's hard not to see this deal as an exercise in reassurance, rather than one that will actually save Greece. This is how you let the markets down gently and keep Far Eastern ecomomies investing in eurozone bonds. And then what? I doubt the political will exists for many more bailouts and bailout conditions, either in Berlin or in Athens. Greece may still be cut loose.