Greek loses austerity fight; what next?

February 23, 2015 09:59 AM

“Complete” surrender by the Greeks. “Major victory” for the eurocrats.

To those who have followed Greece’s financial crisis for five years, there wasn’t much doubt who won the latest round Friday when the region’s finance ministers struck a deal to keep the bailout on track.

Even German Finance Minister Wolfgang Schaeuble, who said he didn’t “want to make it more difficult for them,” concluded Greek Prime Minister Alexis Tsipras will have a “difficult” time selling the agreement at home. That’s because Tsipras’s populist rhetoric of ending austerity was overpowered by the united front he faced.

A “complete political surrender to the world of reality” was how Erik Nielsen, London-based global chief economist of UniCredit Bank AG, put it. Societe Generale SA and Berenberg Bank both labeled it a “u-turn” by Tsipras, who won election Jan. 25 promising an end to budget cutting.

“If the deal holds, it would be a major victory of common sense over populism,” said Holger Schmieding, chief economist at Berenberg in London, who cut his probability of Greece leaving the euro area to 25% from 35%. “The taming of Tsipras would show that Europe’s ‘tough love’ approach is working.”

While Tsipras says skirting national insolvency meant “we won a battle, but not the war,” economists say he may not have managed even that. That’s because the basics of the existing aid deal he fought against are still intact.

Greek Concessions

At last week’s meeting, Greece signed up to all the conditions of its current package and to continued international oversight, ditching plans to win back control of its purse strings so it could raise wages and pensions.

“The combination of pressure on the banking sector and on state cash flows has forced the bulk of the concessions to come on their side,” said Malcolm Barr, an economist at JPMorgan Chase & Co. in London.

There were some concessions. Tsipras now gets a chance to draw up a list of reform ideas rather than have them forced upon him. The fiscal target for this year was also made less specific, giving him potentially some extra cash to throw around at home.

Those tweaks left Commerzbank AG chief economist Joerg Kraemer suggesting while donor nations may have gotten their way, they are ultimately likely to back down on explicit requirements, allowing Tsipras some face-saving room to maneuver.

“Nominally, at least, the creditors have won, but reality is likely to be different,” said Kraemer.

Investors boosted European debt as the fear of contagion from Greece dissipated. Italian five-year bond yields and Portuguese 10-year rates both fell to record lows following the deal.

“Europe has drawn the line in the sand—and markets had absolutely no problem with that,” said Nielsen of UniCredit.

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