Tuesday, February 21, 2012

The art of the deal: Eurozone ministers approve new bailout funds as negotiations stretch into early morning

For some journalists it was a terribly long, long night, as they waited word from Eurozone ministers about whether they would approve a new bailout for Greece. Like waiting for the Sacred College of Cardinals to decide on a new pope, the journalists gathered to see if the EZ ministers and Greek representatives could agree on new terms.

At 11pm the bar stopped serving beer and a flood of tweets appeared in disgust.

But by early this morning the ministers could announce that a new deal had been struck.

“We have reached a far-reaching agreement on Greece’s new program and private-sector involvement,” Jean-Claude Juncker, the prime minister of Luxembourg, and head of the EZ group announced. The $172 billion deal will require private investors to take a bigger "haircut" than previously agreed to, and requires a major leap of faith when it comes to Greek economic growth.

Only the NYT's Stephen Castle seemed willing to give the deal much of a chance. "The agreement could be a new turning point in the European debt crisis, which has raised questions about the viability of the euro itself," he wrote last night (or this morning, if you will). Maybe there is enough vagueness in that sentence to please the NYT, should the deal prove not enough.

In fact, few commentators have been willing to take that leap of faith. Felix Salmon of Reuters was first to post his doubts. The biggest problem he sees is that once again the players somehow believe that continued austerity will suddenly lead to growth.

"The effect of all this fiscal tightening? Magic growth!" Salmon wrote. "A huge amount of heavy lifting, in terms of making the numbers work, is done by the debt sustainability analysis, and specifically the assumptions it makes. Greece is five years into a gruesome recession with the worst effects of austerity yet to hit. But somehow the Eurozone expects that Greece will bounce back to zero real GDP growth in 2013, and positive real GDP growth from 2014 onwards."

It should be remembered that the Greek economy contracted by over 7 percent this past quarter as austerity measures were implemented. The new deal calls for new pain so why should the results be any different? Maybe the Confidence Fairy will finally appear.

Despite the doubts that the new deal will actually lead to Greece turning around its economy while remaining in the Eurozone, it was not in any way a surprise that the ministers should reach a deal.

Anyone who has been involved in M&A will tell you that once all the players are assembled the deal is usually concluded. The EZ ministers all were there, as was the unelected prime minister of Greece and the finance minister, who has visions of being one PASOK's new leader. Each came to the table to reach a deal, even if there was some room to negotiate the exact details.

When a media company buys a property the deal is first presented to the executives who decide whether to take the deal. Once it is passed on to the players, usually the financial team and the lawyers, the deal is bound to get done. I never had a deal fall through that reached the lawyer stage. In fact, from that point it was a piece of cake.

Last night each of the players wanted a deal: the EZ ministers all have a vested interest in the continuation of the Euro, while the Greek representatives had nothing to gain from withdrawing from the Euro. Certainly the Greek finance minister, Evangelos Venizelos, did not want to return to Athens empty handed.**

And so the new round of layoffs will, according to reports, begin in June. But before that date we are still supposed to have elections. A poll, released yesterday, shows that New Democracy, the center-right party that much of the mainstream media believe will take the reigns of government, is polling at 20 percent. PASOK, the party that has been in power since 2009, is at just over 13 percent. That leaves the vast majority of the electorate looking elsewhere – and that has to scare EZ ministers. But canceling the election would surely be the equivalent of staging a coup, and the Greeks have long memories.

Greece remains caught between the desire to remain part of the Eurozone, to feel and believe strongly that they are part of Europe, and the need to have a currency that can be devalued so that a real recovery can take place. The two goals can not be reconciled, choices will need to be made. But when the decisions are being made by players with an interest in the outcome, the results are preordained. The players were gathered, all that was necessary was hashing out the final details. And on we go, this story is far from over.

** The same dynamic applies to labor negotiations, I believe. If a union negotiators is sitting across the table from someone who was hired to break the union you know there will be no deal until the man is replaced with someone who was hired to reach a deal. After that it is only a matter of time.

I was hoping the NYT's Paul Krugman would weigh in on Greece, if only to get him off his obession with the anti-Keynesians. Not surprisingly, Krugman finds himself agreeing with Felix Salmon's point-of-view.

"Now we have another round of austerity — which is assumed not to do too much damage to growth. The triumph of hope over experience," Krugman writes on his NYT blog.

"What’s happening is that nobody is prepared to take the plunge into either of the paths that might eventually lead out of this: sustained aid (not loans) to Greece, or departure from the euro, leading eventually to higher competitiveness and faster growth. Both options would be politically catastrophic, which means that they can’t be taken until there is literally no alternative," Krugman writes.

"So Greece will be strung along some more."