Solving the Greek puzzle

The Greek deal will make its debts a priority but it has lost the trust of the EU leadership and its fellow member states, writes Europe Correspondent Ann Cahill

PUTTING the Greek deal together was like doing the Rubik’s cube. It took 13 hours — roughly €10 billion an hour — to line up all the pieces, though it had taken months of politicking behind the scenes and in front of the cameras to organise it.

Even after that, nobody is saying it will work, much as nobody has said Greece will not need a third package.

However, even as the bankers and economists poured scorn on the clumsy, complicated structure, one minister from a AAA-rated country was heard to say: “If economists are so smart, why are they not rich?”

After the all-night session, everybody was anxious to put the best spin they could on the night’s work.

Everyone had their own wishlist they wanted to say had been fulfilled. Brian Hayes, who represented Ireland, said “the prize for Europe, Ireland and the eurozone is stability”. Italy’s Mario Monti said it “removed the immediate risk of contagion”. Euro commissioner Olli Rehn said it showed “solidarity”, while European Commission president Jose Manuel Barroso said it closed the door to “uncontrolled default”.

It has certainly heralded a new era, with the relatively peaceful takeover of a country and the putting in place of an economic system where the top priority is servicing debt, not looking after the citizens.

The agreement seeks to ensure Greece has a future in the eurozone and that it will repay what it owes. It does this by insisting on a restructure of tax collection and other state administration.

It also seeks an end to keeping accounts in ink-stained ledgers that nobody can read, substituting it with modern computer systems that keep track of records. This transition is under way.

There will be no hide and seek about this process. A team of experts from the European Commission and other countries will join the task force of 50 in Athens who will roll up their sleeves and work alongside the Greek civil servants. Locally they are being referred to as “commandos” and it’s not a flattering term.

Greece — which has seen huge amounts of EU funds disappear in dodgy projects and which lied about its national economic statistics — will not be trusted with the latest bailout fund.

Instead, every three months, the amount needed to service the debt for that quarter will be paid into a separate account and may be used only to pay down debt.

Just to be doubly sure, the Germans and others have insisted that Greece introduce a law before the general election in April that will say servicing debt must take priority over all other spending.

This must be put into the Greek constitution as soon as possible, which will be May 2013 at the earliest, since changes can only be made every five years and the last one was in 2008. It requires two votes in the parliament and 60% agreement, but does not have to go to a referendum.

In the meantime, Greece must put in place savings of €3.3bn which include cutting the minimum wage, cutting pensions, and cutting 150,000 public service jobs over the next three years. It must also make immediate cuts of €325m to close the fiscal gap under the terms of this year’s memorandum of understanding.

While the Greeks have cut over €20bn from its budget deficit in two years, very little progress has been made with resolving any of the underlying problems.

There is a strong elite culture in Greece, where each of the 300 MPs has a good salary, generous expenses and a car, while business oligarchs are assured their money is safe from taxes. As a result, most of the pain has been taken by the general population, but with little promise that it will fundamentally change anything.

The fact that even after two years, only a handful of people were prosecuted for the widespread tax evasion was seen by EU members as proof the politicians were not really committed to change.

They believe they achieved a change following the conference call between the AAA countries two weeks ago. It was followed by tough talk of a plan B of leaving the euro by commissioners and EU leaders. The message was “time’s up”.

“The elites look after themselves — it’s taken a long time to get them on board, they have been willing to let the little people take the strain,” said one optimistic source.

Whether the Greek politicians have fully conceded this or not is somewhat beside the point with the escrow bank account and the veritable take over of the administration.

But will it work?

“Pundits of doom have been saying for the past two years we would fail, but we are still here,” said one EU official. It’s the best deal that could be done, since everyone was between the devil and the deep blue sea, he added.

They did manage to squeeze a bigger loss from the private sector bondholders of 53.5% that should be worth over 70% in the long-term. It involved a lot of negotiating through the night with the Institute of International Finance representing the private sector.

“It was a cat and mouse game with the IIF, who is going to shoot first. They are very skilled, formidable. Life is money to them,” said one EU official.

They are now sure of their money even if some have taken a cut. The AAA member states did all right out of the deal too. The ECB agreed that it would hand back to the national central banks the profit it stands to make on the €50bn of Greek bonds it holds — provided Greece does not default. EU states agreed that they will put this profit — about €13bn — into the Greek pot to reduce the debt.

They also agreed to cut the interest rate on the first €110bn bailout. This sum was made up of governments raising money themselves and putting it into the Greek pot. Greece paid an interest rate that, in the case of the AAA countries, was higher than what it was paying for it on the open market, and so were making a profit. Germany, the Netherlands, and Finland in particular stood to lose some of that profit.

In the end, the millionaire businessman and Dutch finance minister Jan Kees de Jager came up with the solution: Offset some of that “loss” by allowing them to keep part of the profit from the ECB’s bonds.

The IMF has been able to keep its contribution to €13bn and combine it with the €10bn left over from the first bailout, and the European Financial Stability Facility, the EU’s rescue fund, has been raising money on the market over recent weeks.

So Greece will be able to restructure its €14.3bn loan on Mar 20. However, with the economy forecast to contract by 4.5% this year, on top of 7% last year, and no growth until 2014, it’s fair to say that “most of Greece’s problems lie ahead of it, not behind” as Sony Kapoor of the Re-Define thinktank says.

It’s back to our optimistic EU official, who says it is important to remember that “saints have a past, sinners a future”.

The question is, where?