... Tsipras is much worse off for the referendum
Not surprisingly, German chancellor Angela Merkel refused to ‘take part in historical comparisons’, to use her words, when asked whether the tough conditions imposed on Greece were not similar to the crushing war reparations imposed on Germany by the victors in the form of the Versailles Treaty after the first World War. Greek prime minister Alexis Tsipras, of course, must rue the rush of blood that got him to, first, thumb his nose at his creditors for months and then, to ask voters to say ‘oxi (No)’ to austerity measures. With Greek banks running out of cash—they have been shut since June 28—and the country facing the likelihood of crippling inflation and severe shortage of essential imports like petrol if it left the euro, and it becoming clear that a Germany-led Europe was willing to live with the consequences of a ‘Grexit’, Tsipras has been forced to accept far more strict, even humiliating, terms than those on the table before he called for the referendum. The text of the statement between Greece and its creditors begins by talking of the ‘crucial need to rebuild trust’, of ‘de-politicising the Greek administration’, of how the ‘government needs to consult and agree with the Institutions of all draft legislation … before submitting it for public consultation or to Parliament’ and underlines the humiliation by saying ‘the above-listed commitments (there are timelines for each one) are minimum requirements to start the negotiations with the Greek authorities’. There was no similar photo-op provided, but the nature of the text recalls the famous picture of then IMF chief Michel Camdessus standing with his hands folded across his chest—much like a principal watching over a school boy—watching Indonesian President Suharto signing an agreement to meet IMF’s conditions in 1998.
The deal is so harsh that there is no certainty Tsipras will be able to deliver—though he has to rush through critical legislation over the next few days, there is no telling when the government can fall. There is no doubt Greek profligacy is at the heart of its crisis, but the extreme austerity only made things worse since, with GDP collapsing a fourth since 2008, debt-to-GDP and other financialparameters only worsened. Though the IMF admitted in its World Economic Outlook way back in October 2012 that the impact of the fiscal multiplier had been severely underestimated—in English, it means the impact of a fiscal compression on GDP was far worse than imagined, by 2 to 3 times—Monday’s agreement with Greece suggests no lessons have been learnt. Which is why, while not spelling out the extent of the austerity measures, Greece is expected to—by July 15—enact legislation to introduce ‘quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions’. Indeed, a June 26 IMF analysis of Greece’s debt sustainability, spoke of a haircut on debt along with extended concessional financing—it spoke of doubling of grace and maturities on existing debt and also a significant haircut of debt …. full write-off of the stock … (of 53.1 billion euro)’. Yet, there is little chance of that since the text of the agreement reached on Monday says ‘the Euro Summit stresses that nominal haircuts on the debt cannot be undertaken’. In other words, while the immediate possibility of a ‘Grexit’ has been avoided, not much thought seems to have been paid to making the austerity more bearable. Expect a lot of political turmoil in Greece, with the possibility of a few more elections, even an eventual ‘Grexit’.