Greece: One day at a time
In their approach to the Greek crisis, European officials have taken the time-honoured route of taking it one day at a time - with the financial markets always several steps ahead. They hope to have broken the spell yesterday, with the new statement hammered out, over the phone, by eurozone ministers and officials.
Will it work? The British election is taking up a lot of my brain-space today, but some quick thoughts.
As I said on the Today programme this morning, this deal has three key features which the previous two statements of support (in February and March) did not have.
First: there's the higher headline figure: the ministers agree that "up to 30bn euros" could be made available to Greece by the eurozone group, up from the 22bn euros mentioned previously. There will be IMF money on top of that: the number being bandied about is 15bn euros, but I'm told to expect a higher total figure.
If so, European officials will have at least learned one lesson from past IMF-assisted bail-outs: when the package is formally unveiled, it helps if you can give the markets more than they expected.
Second, and crucially, we have a sense of the interest rate that Greece would be charged. For a three year fixed-rate loan, the statement implies that Greece would be charged the Euribor three year swap rate plus 3% - which would come out just under 5% at current market conditions. There would also be a one-off service fee of up to half a percentage point. The IMF money will be much cheaper, taking the average cost down to under 4.5%.
That is not cheap. But it's a lot better than the 7% the market was charging Greece on its bonds late last week. It is also probably the lowest that Germany could support.
That, of course, is the third key attribute of the new agreement. Unlike the previous statements to be drip-fed out of Brussels and Frankfurt, this one has Jurgen Stark's fingerprints all over it. In the past week or two, I'm told the German representative at the ECB has been a key part of the negotiations, second only to the ECB President, Jean-Claude Trichet.
Germany has not dropped the rather strange idea that Greece should pay "market rates" for its money (I say strange, because if it could pay market rates, it wouldn't need the money at all). But they have accepted a distinction between the "market rate" demanded by an hysterical European sovereign bond market, and a market rate suggested by the fundamentals.
Does 5% capture the "underlying" value of Greek debt? No-one can say. But we can say that in pricing Greek debt, investors are not - and should not be - ignoring the possibility of a Greek default. In that sense, the eurozone money is "cheap". Whether it is cheap enough to transform the situation for the Greek government is a more open question.
The questions for the next few days are: first, what exactly are the conditions of the support plan, and how soon could it be triggered? That will be especially important for Germany: Chancellor Merkel is apparently still hoping, against the odds, to avoid sending any money out the door before the state elections in North Rhine-Westphalia on 9 May, which could lose her party its majority in the Bundesrat. But if the next few days do not go well for Greece, its prime minister may well want to speed up the pace.
Second, and related, will the IMF require the Greeks to tighten policy a lot further in the next year or two? My guess is that the answer to that question will be no. But it will want the government to commit to longer term structural reforms to increase its competitiveness which could be even harder, politically, for the Greek government to push through.
Third, and the most important question - also the one most likely to be glossed over in the coming weeks - is whether this gives Greece a better chance of coming out of this with its economy, and its standing as a sovereign borrower, intact. As I have said before, a loan package, in and of itself, doesn't lastingly address either Greece's debt problem or its competitiveness one (see my posts of 9, 10 and 11 February). It simply buys it some liquidity, and some time: in this case, slightly less time than might usually be the case with this kind of programme, because of the higher interest rate.
In debt crises, time is a precious commodity. With luck, this deal will help Greece get through to the end of the year - maybe further. Its banks will also be helped by the ECB's decision to continue to accept lower-rated debt as collateral for cheap liquidity in 2011. (As I said on 3 March, distasteful though it might be to give backdoor support to the Greeks, the ECB was never going to let Greece's fate be determined by the decisions of a single American-owned ratings agency.)
But, in the cool light of day, I suspect that many investors will still look at the state of the economy and the public balance sheet and conclude that, sooner or later, Greece's time is going to run out.
Update 1817: Several of you have queried my use of the word 'hysterical' in relation to European sovereign bond market. You have a point.
Given what I - and others - have said about the severity of Greece's problems, it is probably rational to require a very high return on Greek debt. But in my defense, I was describing how the Germans might rationalise charging the Greeks a "market rate" that is less than the rate actually prevailing in the markets. As you know, senior German officials think that market hysteria - and speculators' greed - are responsible for a great many economic ills.
Then again, it was Germany that was most wedded to the "no bail out" clause for the Eurozone, and it is Germany that is most keen to reinstate it as soon as governments feel they can let a country default wuthout putting the entire system at risk.
If you believe, as they do, that default should be a genuine possibility, then the 7% starts to look very sensible indeed. But, as we've seen, we are not (yet) in a world of messy Eurozone defaults. We're in a world of messy Eurozone bailouts.