April 3, 2017 / 1:55 PM / 4 months ago

Dixon: Start preparing for fourth Greek bailout

A protester kneels to pay his respect in front of a Greek flag during an anti-austerity rally in Athens, Greece, June 29, 2015.Yannis Behrakis

ATHENS (Reuters Breakingviews) - Despite an eleventh-hour wrangle over pensions last week, Greece’s creditors are soon likely to approve the latest payment due under its current 86 billion euro bailout programme. But this will only buy Athens time until mid-2018. After that, a new programme – the country’s fourth since the start of its financial crisis – will probably be required.

Alexis Tsipras needs his euro zone creditors to give him enough cash to pay about 7.5 billion euros of debt falling due by July. For that to happen, they must agree the current bailout is on track. The left-wing prime minister’s habit of dragging out negotiations rather than biting the bullet has already hurt the economy, which shrank in the final quarter of last year and probably contracted again in the first quarter of this year.

It seems Tsipras will ultimately be willing to drink the latest dose of bitter medicine, even though it includes unpopular pension cuts and income tax increases in 2019 and 2020 that will together tighten fiscal policy by 2 percent of GDP. This potion will be sweetened by a concession: if Greece continues outperforming its budget targets, as it did last year, it will be allowed to offset the new “bad” measures by cutting corporation tax, improving its social safety net and other “good” measures.

The euro zone has Athens over a barrel. Although Tsipras should be able to cobble together enough money to pay the debt due in July, were he not accept to the creditors’ deal he would have to run up arrears to local suppliers – something that would hammer the economy. Prolonging the agony would further dampen the private sector’s depressed animal spirits.

The killer consideration for Tsipras is what would happen to the banks. Deposits have been flowing out of the system again this year. That doesn’t just mean that credit conditions are tightening again; if the economy enters a new downward spiral, the banks will need new capital injections. Tough euro zone bank bailout rules that came into effect last year might necessitate a haircut for depositors. Tsipras’ misguided brinkmanship led to economic chaos and the imposition of capital controls in 2015. He would be foolish to repeat the experiment.

Next comes the question of debt relief. The International Monetary Fund, which Germany is insisting joins the bailout, wants the euro zone creditors to ease up. Chancellor Angela Merkel and IMF Managing Director Christine Lagarde need to agree a form of words on debt relief that keeps the Fund on board but doesn’t lead German voters, who are hostile to the idea of cutting Greece more slack, to cry foul in the run-up to Merkel’s re-election bid in September.

This new phraseology, which will probably be thrashed out in May, should also be enough to persuade the European Central Bank to include Greek government bonds in its quantitative easing programme. That would boost confidence. Greece will probably have to wait until next year to get into the nitty gritty of debt relief, but Tsipras’ weak negotiating position means he can’t do much about that. 

The current bailout ends in mid-2018. Might Greece then be able to finance itself in the markets? It seems unlikely – or at least, not without help. In other words, expect the third bailout to be followed by a fourth.

At the minimum, Greece will need a precautionary credit line from the euro zone. It may also need a small amount of actual hard cash, though nothing as big as the current 86 billion euro programme. In the next bailout, financial aid is likely to come mainly in the form of debt relief, not new loans. The priority will be to shift out to the future a hump of interest payments that kicks in from 2022.

Germany and the other creditors are most unlikely to do all this for Athens without strings attached. They have learnt the old principle that, if you want to motivate an unwilling donkey, you should tie a carrot on the end of a stick rather than let it chomp the carrot in one go. So debt relief would probably come in chunks as Athens hits further fiscal milestones. It wouldn’t be surprising if further structural reforms were thrown into the mix, especially if the IMF is involved.

All this may be just too much to swallow for Tsipras, whose popularity is sliding after so many broken promises. If so, Greece may heading back to the polls in 2018, with the centre-right New Democracy Party the favourite to win. One thing though is unlikely to change: Greece will stay in the debtors’ prison for many more years.

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