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Greece Still Seeking Concessions After Bailout Extension

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Deal or no deal? Despite the fact that Greece won a four-month extension of its bailout, it remains to be seen just how much of a deal that is. And while markets rose on the news, investors aren’t comfortable that they’ll come out of it unscathed.

They could be right. Although the 18 other nations of the euro zone are sitting in the catbird seat, Greece’s new anti-bailout government fought them tooth and nail over the terms under which they could win an extension of funding without having to continue with all the conditions of the deal that had given it the bailout in the first place. Instead Greece had sought a bridge loan, declaring its days of austerity were over, until substantial pushback from both Germany and the ECB forced it to reconsider its battle plans and resort to a Plan B.

The battle is far from over, however, particularly now that other fiscally challenged countries in the bloc, such as Spain, are closely watching the actions of Syriza, Greece’s anti-austerity party, since it emerged victorious from Greece’s elections.

Greece’s bailout expires at the end of the month, and according to reports, it lacks enough money to get by past March without additional assistance from the troika—the European Central Bank, the European Union and the International Monetary Fund—particularly since the ECB announced at the beginning of February that it would no longer accept Greek bonds as collateral. That pushed Greece’s borrowing costs higher, and came after a negative outlook from Fitch Ratings in January, even before the election. As a result, depositors quietly began to make larger withdrawals from Greek banks over concerns that capital controls will be imposed.

Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, who first stood firm against even asking for an extension on the bailout, have been forced to make some concessions just to get to the bargaining table. That was thanks in large part to Germany’s insistence on Greece abiding by the original terms of its bailout or see its funds cut off.

But Greek leaders had at least limited success for their efforts, since what they’ve asked for, while not exactly a bridge loan, also isn’t precisely termed an extension either, depending on whom you ask—and also because Greece has been allowed a limited amount of leeway in choosing how it will continue to meet the troika’s requirements to continue the bailout. In addition, the much-hated troika is “troika” no more; the new agreement refers to them as “the three institutions”—a change in language only that nonetheless holds significance for Greeks.

The 11th-hour deal reached February 20 was contingent on Greece submitting particulars on how it will meet troika requirements by February 22. Then there is still approval to be won by the powers that be—not to mention that any such deal will then require other member countries’ parliaments to vote in favor of it. So the road ahead is far from easy. Still, at present it appears that a Greek exit from the euro has been avoided, at least for the short term, although most circumstances of the current arrangement merely kick the can down the road for another four months.

Still, Greece has managed so far to retain a bit of autonomy over how it meets bailout benchmarks, which it says will focus on tax evasion and make changes in its civil service system. It has also managed to leave the door open to reduce the target for its primary budget surplus, which it hopes to use to cut unemployment and reverse some pension cuts.

But thanks mainly to Germany’s continued rejection of all Greece’s efforts at negotiating changes, even apparent willingness to let Greece depart the euro zone rather than relax any bailout provisions, all repayment targets are still in place. Spain did its part to stand firm as well, its current government fearing the possible benefits in coming elections to its own rising anti-austerity party Podemos should Greece succeed in winning any concessions.

The irony is that Germany, which has fought the hardest all along against any compromise with Greece over the austerity measures that have crippled its economy, stands to lose the most should talks break down in the end, leading to a Greek departure from the joint currency. Germany is Greece’s largest indirect creditor in its bailout.

While certainly Germany’s determination to prevent any softening of terms might be expected, at the same time a failure to allow flexibility could in the long run cost it more, if Greece ends up out of the euro; various reports put the figure as high as 80 billion euros. But the adversarial relationship between Varoufakis and German Finance Minister Wolfgang Schaeuble, who has consistently dismissed all Greek efforts to negotiate, could still spell trouble.

However, at press time no capital controls had been imposed on Greece’s banks, although according to Jeroen Dijsselbloem, chairman of the Eurogroup, Greece may not use any of the loan funds for government needs but solely to recapitalize its banks.

According to John Blank, chief equity strategist at Zacks, the terms of Greece’s agreement should be changed. Quantitative easing by the ECB has lowered interest rates on other countries with heavy debt loads, but that hasn’t happened for Greece because it is in the position of having to use hard currency reserves, and because the troika has set the interest rates it must pay on the loans it’s received for its bailout.

“Greece needs … some space,” said Blank. “They need … a three-year moratorium on principal payments, and a five-year moratorium on interest payments.” He added that Greece must cut its government spending, because its government is larger, proportionally, than in other countries its size. “Why is spending so high? The more unstable a government is, the more likely you’re going to get no long-term vision, and lots of spending trying to win elections,” he said. A more stable government, thinking long term, will base its decisions more on what a country needs than on the outcome of the next election.

What Greece needs, Blank said, is a requirement for some of the money it receives as part of its bailout to be “spen[t] immediately on infrastructure. That will turn the economy around.” He also said that Tsipras and Varoufakis “are not irrational; they understand this, and they’re basically right. [Greece] can’t go on without some kind of help.”

Blank said, “This is a deal that can be done, and any sane person would do it because the natural affinity here is to see Greece grow—because that’s how Europe gets paid back and gets strong. Tsipras [and the other officials] are probably saying this right; they need a new deal now. What QE brought for Italy, Spain and France isn’t going to work for Greece. Effectively, Ireland, Italy and Spain got a better deal with QE; Greece has to get a new deal that’s better than those deals because it’s in worse shape.”

While Germany is looking long term at the need for repayment, Blank said, “it, and Schaeuble, [don’t] understand the short-term need for dynamics. As long as Schaeuble relents at the end, for some kind of stimulus that comes from [the negotiations] that will put austerity back on track.”

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