Finally there is a deal. It came late, and only after the financial markets – and a rating agency – forced the European Union to put up or shut up. It will provide Greece with emergency loans at a rate of about 5 per cent, which is lower than present market rates. There is no agreement yet about the overall amount of money to be disbursed. But I hear that the total figure will be much larger than has been widely reported – somewhere between €50bn and €60bn.
It is not the worst conceivable deal. That would have been the German idea of funding at market rates. It is evident that the economic advisers of Angela Merkel, the German chancellor, have little experience with the resolution of international solvency crises. Otherwise they could not have conceivably insisted on such a ludicrous idea. The 5 per cent interest rate that has been agreed is, in my view, still relatively high given the situation Greece is in, and the likely debt dynamics it will face in the next few years. However, 5 per cent is better than the 7 per cent or so of the recent market rates for Greek two-year bonds. Moreover, the European Central Bank decided last week to prolong the exceptional collateral regime, which allows banks that own Greek bonds to exchange their assets for cheap central bank funds. This was a significant announcement, and will provide Greece and its creditors with breathing space.
So will this stave off insolvency? It is important to distinguish the near-term insolvency as a result of the failure to roll over existing debt, and the country's long-term solvency position. This deal, I am confident, will solve the first issue. As I predicted last week, Greece will not default this year. But I am still sticking with my second prediction that Greece will eventually default. The numbers simply look too bad. The adjustment effort Greece is asked to make will be one of the largest in history. But unlike other countries that made a similar effort in the past, Greece cannot devalue; it faces a much more challenging global environment; it has a weak fiscal infrastructure; a low consensus in society in favour of deep reforms; and a fragile financial system. The agreed bail-out terms do not exactly offer much relief, except in the very short-term. It will become clear very soon that this loan agreement represents a net transfer of wealth from Athens to Berlin – and not the other way round.