Greece is set for a third bailout

15-8-13-Tsipras-634 — Alexis Tsipras has clinched Greece's third bailout

Greece and its creditors, the IMF, the European Central Bank (ECB) and the European Union, have agreed a draft €86bn, three-year bailout. In return for passing a series of reforms this week, including VAT increases for the Aegean islands and a commitment to ending early retirement for workers in their 50s, Greece will get new funding, allowing it to meet next week's payment to the ECB.

The deal, which must be approved by the German parliament next week, will see Greece aim for looser fiscal targets than the creditors first wanted. It is aiming for a primary budget deficit (before interest payments) of 0.25% this year, instead of a 3% surplus. An independently monitored fund is to raise €50bn to recapitalise banks and cut debt.

What the commentators said

We may have a deal, said Jordan Weissmann on slate.com, but the fiscal targets remain unrealistic. The creditors are pencilling in annual primary surpluses of 3.5% for several years from 2018 onwards. But "countries rarely manage that sort of restraint, and politically, the ones that do tend not to look a whole lot like Greece".

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

And that's assuming the GDP growth estimates the fiscal targets are based on are remotely realistic, added Capital Economics. In fact, they're a "fantasy". Capital controls have starved the economy of money and caused activity to collapse. GDP is set to shrink "by 4% or worse", double the pace reportedly factored into the bailout projections.

The deal will "unravel" before the three years are up. Greece will only avoid the threat of "Grexit" if some of its borrowing is written off, said Robert Peston on the BBC. Debt relief is due to be discussed in the autumn. But the EU will be loath to concede much for fear of encouraging populists elsewhere to take arms against Brussels in hope of emulating Greece. Don't expect a "happy ending".