After months of brinkmanship played out in public, it took a further 13 hours of negotiation to finalize details of Greece's €130 billion ($172.1 billion) bailout, its second in two years. The intensity of the debate reflects the enormity of the stakes: this is the largest sovereign bailout in history and it involves the largest-ever sovereign debt restructuring, with private-sector bondholders being required to accept a 53.5% write-down in the value of their bonds worth €107 billion. Failure would have led to a Greek bankruptcy, almost certain to be followed by its exit from the single currency. By taking this catastrophic risk off the table, at least for now, the euro zone will have given another boost to market confidence.
Even now, a bad outcome can't be ruled out. The bailout depends on Greece completing the bond swap with private bondholders, setting up an escrow account to ring-fence cash needed for interest payments and fulfilling outstanding reform commitments, including a reduction in the minimum wage. The bailout must also be approved in a number of parliaments, including those of Germany, Finland and the Netherlands, three countries where political opposition to the bailout is running highest.
It is easy to find fault with what has been agreed to. If all goes to plan, the deal will only cut Greece's debt load to 120.5% of GDP by 2020, a level many fear will prove unsustainable. The growth assumptions underpinning the deal will strike many as optimistic, with the economy forecast to grow 1% in 2013, having shrank 7% last year. That forecast depends on Greece delivering structural reforms to boost competitiveness. The International Monetary Fund acknowledges that in its worst-case scenario debt is still 160% of GDP by 2020. That will fuel concerns that this won't be the last bailout and that the burden of any future debt relief will fall on euro-zone taxpayers, a politically toxic prospect. So far, official-sector contributions are limited to the European Central Bank forgoing profits on its Greek bonds and euro-zone governments cutting rates on their loans to Greece.
But these concerns only underline the significance of what has been achieved. Despite all the talk of pushing Greece into default—never entirely credible—the euro zone has more than doubled its financial commitment to more than €200 billion, giving Greece's partners a far greater stake in the country's future. This is the latest in a series of steps since last October that show the euro zone remains determined to hold the currency bloc together. Further important steps remain, of course, including pushing ahead with single-market reforms, boosting structural funds and ultimately creating euro bonds. And two potential political icebergs lie in wait in the form of the Greek and French elections in April, either of which could alter the fragile balance that has emerged in recent months. But if these can be safely navigated, political space could open up for further steps to deepen euro-zone integration in the second half of the year.
Those who hoped and believed the euro zone would collapse under pressure continue to misjudge the political determination to hold it together.
