Outgamed

BY EURO-ZONE standards it seemed a blessedly straightforward affair. At the relatively civilised hour of 8.30pm Friday night the Eurogroup of euro-zone finance ministers agreed to extend Greece’s second bail-out, which was due to expire on February 28th, by four months. A deal had hardly been assured. Two previous Eurogroups had ended rancorously, and a spat between the Greek and German governments on February 19th had soured the mood further. Jeroen Dijsselbloem, the group’s chairman, began yesterday by downplaying expectations. But by the evening, after having successfully brokered discussions between the Greeks, the Germans and the European Commission, he was able to describe the outcome as “very positive”. (A recent acceleration in deposit outflows from Greek banks appears, in part, to have forced Athens’s hand.) The extension should unlock the funding Greece needs to stay afloat over the coming months and, at least for now, quiet talk of its departure from the euro.

That is the good news. But euro-pessimists never have to look hard to bolster their case. The doubts begin with the terms of last night’s deal. By Monday the Greek government must present a list of reforms it intends to carry out under the terms of the bail-out extension. The European Commission, European Central Bank and the IMF—once known as the “troika”, now renamed the “institutions” in a gesture to Greek semantic sensitivities—must give their assent. If they do not, said Yanis Varoufakis (pictured), Greece’s finance minister, “the deal is dead”. The arrangement does at least allow the Greeks to reclaim some authorship of their country’s policies, but in reality they are likely to have to make some painful concessions, over pension reform, for example. It will be a busy weekend in Athens.

But Mr Varoufakis’s government also has a rather different constituency to satisfy: opinion at home. Alexis Tsipras, the prime minister, was elected on a pledge to tear up Greece’s bail-outs and leave austerity behind. Mr Varoufakis has spent the last few weeks seeking a “bridging arrangement” as an explicit alternative to a bail-out extension. It is difficult to square these promises with last night’s agreement. Greece has secured no change to the terms of its epic debt, which stands at over 175% of GDP. Its behaviour will continue to be supervised by the institutions formerly known as the troika. It is obliged to refrain from passing any measures that could undermine its fiscal targets; that appears to torpedo vast swathes of its election manifesto, which included all manner of spending pledges.

Hardline members of Mr Tsipras’s Syriza party will find all of this hard to swallow, as will Greeks who thought they had voted for rupture. “The Greeks certainly will have a difficult time explaining the deal to their voters,” was the ungracious verdict of Wolfgang Schäuble, Germany’s finance minister and Greece’s fiercest adversary in the talks of the last few weeks. Expect Mr Tsipras to make much of the few prizes Greece has been able to secure, including permission to run a slightly looser fiscal policy and, with luck, a decision from the European Central Bank to allow the use of Greek government debt as collateral.

Even assuming the wrinkles can be ironed out, Greece still faces an immediate funding squeeze. The bail-out funds can only be released after a “review” of the bail-out provisions; that, according to the agreement, will not happen before the end of April. And Greece was already under financial pressure. It must repay a maturing IMF bond worth €1.5 billion ($1.7 billion) in mid-March, and tax revenues have plummeted in recent weeks. The government has reached a €15 billion ceiling on T-bill issuance imposed by the troika, and there was no suggestion last night that it might be lifted. The next two months will be painful indeed.

Yet the turbulence of the last few weeks may come to be remembered fondly next to the trouble to come. For Greece will not be able to return to the capital markets when the bail-out extension expires at the end of June, and will therefore need to secure a long-term financing deal with its euro-zone partners before that. Most will call this a third bail-out; Mr Varoufakis’s preferred term is the sunnier-sounding “contract for recovery and growth”. Regardless of the nomenclature, the terms of the deal will be extremely difficult to iron out. The conditionality that the Germans and others will insist on as the price of further support will run directly counter to Syriza’s promises to cut Greece’s shackles to its creditors. Unlike the second bail-out this deal will be “owned” by Mr Tsipras; he will not be able to blame his predecessor for it. And the deadline comes at the worst possible time for the Greeks, because it faces bond redemptions worth €6.7 billion in July and August. This is why they had originally sought a six-month extension. Mr Tsipras may feel obliged to put the outcome of the talks to a referendum, or to call fresh elections.

Amid the fretting over the euro in the last few weeks, a softer currency has been debased: that of trust. The Germans and others were perhaps guilty of expecting too much too soon from a party elected on an explicit promise to break with the old ways, but Syriza bears the brunt of the blame. It has postured and provoked, making references to Germany’s Nazi past, and jeopardised potential allies in its battle against austerity. It badly mishandled the battle over its bail-out extension, lecturing its euro-zone partners when it ought to have sought accommodation. As a result the talks to come will be more painful, and Greece’s room for manoeuvre more limited, than they would otherwise have been. Mr Dijsselbloem, a man not normally given to eloquence, expressed it best: “Trust comes on foot,” he said last night, “and leaves on horseback.”

Dig deeper:
The Eurogroup statement on extending Greece's programme for four months
Greece's economic agony, and its attitude towards the euro