Grexit wounded, but not dead yet

The conundrum of whether Greece will stay in the eurozone or whether it won’t has finally been resolved – at least to some extent.
Euro 50 billion of long-delayed aid will be paid to Athens it was decided on Thursday, prompting an ecstatic response from the Greek premier, Antonis Samaras, “Grexit is dead”.
Euro 34.3 billion of the total agreed amount will be given to Greece immediately, while the remainder will be provided over the course of the coming months till March, provided Greece meets a series of reform benchmarks.
This aid hinged on Greece buying euro 32 billion worth of debt from local banks and foreign investors, repurchased at almost a third of its face value – a deal that has been agreed by private investors. This will help shave off nearly euro 20 billion from Greece’s whopping debt pile of euro 344 billion.
The country had been through quite a lot before this disbursement was agreed. Political turmoil, riots, and even worse, the possibility of an exit from the eurozone had analysts talking not just about the economic sustainability of the country, but also of the stability of the 17-nation bloc.
Of the euro 34.3 billion in aid that will be received, euro 7 billion will cover budgetary shortfalls and euro 16 billion will be used for banks’ recapitalization. The remaining euro 11.3 billion will cover costs related to the debt buyback.
This break-up of costs seems quite ironical, given that euro 11.3 billion had to be spent to get the euro 34.3 billion in the first place. Besides, while the euro 16 billion allocated for banks seems like a good deal in propping up the country’s banking sector – more deposits, greater lending –, these banks agreed to selling Greek bonds at a 2/3rd discount anyway.
Therefore, while the Greeks and eurozone ministers may cheer on, skepticism about Greece meeting the reform conditionalities remain.
“Citigroup Chief Economist Willem Buiter had put the likelihood of a Greek exit within 18 months at 90 percent earlier this year. But he has since reduced that to 60 percent, arguing that Greece could fail the next donors’ review in March or see its fragile pro-bailout coalition crumble,” said an article in the Reuters on the subject.
Overall, Greece needs to put its debt burden in control. This aid programme is expected to ease Greece’s debt burden to 126.6 percent of GDP by 2020, which is quite hefty on its own, let alone above the 124 percent target set by the IMF for Greece. Straying from the target will cost the Greek government loss of IMF’s support.
“I welcome the Eurogroup’s decision to support the debt buy back operation for Greece and its assurances to provide additional debt relief if necessary and provided Greece has achieved a primary budget balance in 2013. These steps will ensure that Greece’s debt-to-GDP declines to 124 percent by 2020 and to substantially below 110 percent by 2022,” Christine Lagarde, Managing Director of the IMF said in a statement after the deal.
So the onus of responsibility still remains in Athens to put its fiscal situation in order. After all, achieving a primary balance by 2013 will be no easy feat.