Monday, 26 November 2012

A Good Result After All

Greek Finance Minister Yiannis Stournaras and Jean-Claude Juncker.
I am more than happy to see that the EU leaders have reached a decision concerning the fate of the Greek debt. Many rumors had been surrounding this Eurogroup meeting and many feared the worst when German Finance Minister Wolfgang Schäuble and Luxemburg Prime Minister and President of the Eurogroup Jean-Claude Juncker announced that a deal was close. The new deal will allow Greece to reduce its debt burden to 124% of GDP by 2020 and to "substantially lower" than 110% by 2022 as reported in the Eurogroup statement on Greece.

For once, I have to say that they paid some attention to what I had been raging about all this time. In the What will happen to Greek debt article I had posted on Thursday, on of the two possible solutions mentioned had been pausing interest payments for a period of 5 years. What they did was not the exact same as what I had proposed but very similar:
1. decrease interest rates on the outstanding debt by 1%
2. lower the guarantee fee costs paid by Greece on the EFSF loans by 0.1%
3. extend the maturities of the bilateral and EFSF loans by 15 years
4. commit the Member States to pass on to Greece's segregated account, an amount equivalent to the income on the SMP portfolio (which basically is the Greek debt the ECB holds and basically belongs to each EU nation in a specific proportion for each) accruing to their national central bank as from budget year 2013. Member States under a full financial assistance programme are not required to participate in this scheme for the period in which they receive themselves financial assistance

In addition, as soon as the the EFSF disbursements are approved by the parliaments of all Member States, Greece will receive 43.7 billion euros, of which 34.2 will be given in December and the rest in three installments during the first quarter of 2013. Thus, as Greece will need to use 23.8 billion to recapitalize banks, almost 20 billion will be left to be allocated in the nation. 

What is the most important moral of this decision is that for once a decision was made to accommodate a nation and not to punish it for what had happened. The solution, unlike the one for the bond haircut, is more likely to yield positive results both in the short run as well in the long run without having any adverse effects on any country's economy. Hopefully, this would bring an end to series of decisions which were aimed at assigning blame rather than promoting what is good for the Union. And maybe, in a few months, they will realize that inane austerity is not the solution for the problem in the EU. Bad decisions, irresponsible bankers and corrupt politicians and policymakers are.

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