Mohamed El-Erian
Jun 25 05:30
Alexis Tsipras, the Greek prime minister, took to Twitter yesterday to signal that some of the country’s creditors are resisting his government’s new policy proposals. While this needn’t derail totally derail the upcoming European meetings, including this evening’s finance minister gathering and tomorrow’s leaders’ summit, it should remind markets of the considerable potholes facing a rapid and meaningful resolution of this tragedy.
With gains of 4 per cent in Germany and 9 per cent in Greece on Monday, markets were right to respond positively to signals out of Brussels that several European officials deemed the Greek government’s latest policy submission to constitute a “robust proposal” that opens the door for potential agreement. Remember, this came after a period of nearly-dysfunctional negotiations that saw material policy disagreements made worse by insults and accusations from both sides, even leading IMF Managing Director to regret the absence of “adults in the room.”
But rather than a qualified optimism — that is to say, one that is guarded, and is a lot more relative that absolute — many market participants jumped to the view that the latest Greek policy concessions, including a series of fiscal new measures, would quickly unlock some €7bn of committed but undisbursed aid. And the temptation for such hopefulness is considerable.
Without this emergency assistance, Greece would likely default on this month’s debt payments to the International Monetary Fund, and do so in the context of a banking sector implosion, capital controls, and the introduction of government IOUs to meet domestic obligations. Such a series of events, along with the further chaos they would engender, would likely push Greece out of the Eurozone.
Yet today’s Tspiras warning serves as an important reminder that optimism over Greece needs to be placed in its proper context, if only because the parties involved — be it Greece or members of its creditor grouping — can no longer be readily united after so many false starts and broken promises on all sides. Indeed, this speaks to four bigger risks that face current (and future) attempts to avoid a “Graccident” and to restore Greece as a healthy functioning member of the Eurozone:
If they do indeed manage to iterate to an agreement this week, and this is still far from certain, Greece and its creditors face the difficult challenge of selling it to their domestic constituents, including gaining parliamentary approval in Athens and then Berlin and some other European capitals. At best, it would be naive to expect anything but a really bumpy ride. Domestic political rejection is not out of the question.
If domestic constituents are brought on board, the implementation of the agreement would then face a series of other challenges on the ground that could easily derail it. Chief among them is a precarious Greek banking system whose ECB life-support system is not sufficient to restore the flow of credit to an economy that is back in recession and likely to contract further, adding to an already alarming unemployment tragedy.
When viewed in the larger context, the agreement being discussed this week is actually quite a limited one. Most importantly, it is insufficient to generate the growth and economic dynamism that the Greek people desperately need and genuinely deserve. So even before the ink dries fully on the interim agreement, all parties involved would have to transition to the much larger task of agreeing on a comprehensive third bailout package whose scope and scale (policy, financing and debt reduction) would need to be more ambitious on all sides.
Creditor co-ordination is getting a lot harder as illustrated by today’s signals, and for good reasons. The ECB, EU, IMF and European governments differ on important aspects of their economic assessments, policy aspiration, political sensitivity, and financial burden sharing.
In sum, markets’ optimism on Greece should, at best, be both guarded and relative. Yes Greece and its creditors now have a better basis to sit together and negotiate as they seek to avoid an increasingly threatening big accident. Yet, because of the incomplete solutions of the last few years, the road ahead of them all has become a very long indeed; and it is one that comes with already-identifiable potholes, as well as the material probability of further disruptions that wouldn’t cope well with the ever-tempting reversion by all sides to excessive grandstanding, incendiary rhetoric, and a harmful blame game.
With gains of 4 per cent in Germany and 9 per cent in Greece on Monday, markets were right to respond positively to signals out of Brussels that several European officials deemed the Greek government’s latest policy submission to constitute a “robust proposal” that opens the door for potential agreement. Remember, this came after a period of nearly-dysfunctional negotiations that saw material policy disagreements made worse by insults and accusations from both sides, even leading IMF Managing Director to regret the absence of “adults in the room.”
But rather than a qualified optimism — that is to say, one that is guarded, and is a lot more relative that absolute — many market participants jumped to the view that the latest Greek policy concessions, including a series of fiscal new measures, would quickly unlock some €7bn of committed but undisbursed aid. And the temptation for such hopefulness is considerable.
Without this emergency assistance, Greece would likely default on this month’s debt payments to the International Monetary Fund, and do so in the context of a banking sector implosion, capital controls, and the introduction of government IOUs to meet domestic obligations. Such a series of events, along with the further chaos they would engender, would likely push Greece out of the Eurozone.
Yet today’s Tspiras warning serves as an important reminder that optimism over Greece needs to be placed in its proper context, if only because the parties involved — be it Greece or members of its creditor grouping — can no longer be readily united after so many false starts and broken promises on all sides. Indeed, this speaks to four bigger risks that face current (and future) attempts to avoid a “Graccident” and to restore Greece as a healthy functioning member of the Eurozone:
If they do indeed manage to iterate to an agreement this week, and this is still far from certain, Greece and its creditors face the difficult challenge of selling it to their domestic constituents, including gaining parliamentary approval in Athens and then Berlin and some other European capitals. At best, it would be naive to expect anything but a really bumpy ride. Domestic political rejection is not out of the question.
If domestic constituents are brought on board, the implementation of the agreement would then face a series of other challenges on the ground that could easily derail it. Chief among them is a precarious Greek banking system whose ECB life-support system is not sufficient to restore the flow of credit to an economy that is back in recession and likely to contract further, adding to an already alarming unemployment tragedy.
When viewed in the larger context, the agreement being discussed this week is actually quite a limited one. Most importantly, it is insufficient to generate the growth and economic dynamism that the Greek people desperately need and genuinely deserve. So even before the ink dries fully on the interim agreement, all parties involved would have to transition to the much larger task of agreeing on a comprehensive third bailout package whose scope and scale (policy, financing and debt reduction) would need to be more ambitious on all sides.
Creditor co-ordination is getting a lot harder as illustrated by today’s signals, and for good reasons. The ECB, EU, IMF and European governments differ on important aspects of their economic assessments, policy aspiration, political sensitivity, and financial burden sharing.
In sum, markets’ optimism on Greece should, at best, be both guarded and relative. Yes Greece and its creditors now have a better basis to sit together and negotiate as they seek to avoid an increasingly threatening big accident. Yet, because of the incomplete solutions of the last few years, the road ahead of them all has become a very long indeed; and it is one that comes with already-identifiable potholes, as well as the material probability of further disruptions that wouldn’t cope well with the ever-tempting reversion by all sides to excessive grandstanding, incendiary rhetoric, and a harmful blame game.
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