Now that the Greek parliament has voted to accept austerity terms necessary to obtain a second EU/IMF bailout, the action moves back to Brussels on Feb. 15, when euro-area finance ministers meet to decide whether to unlock the funds. (Update: The face-to-face meeting was canceled in favor of a phone conference.)
One deciding factor may be the idea proposed by Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy last week in Paris: that the bailout funds are paid into an escrow, or separate, account to guarantee that lenders are repaid.
Jacob Funk Kirkegaard of the Peterson Institute for International Economics in Washington says the proposal could be a game changer for the Greek debt restructuring deal and for Greece’s relationships with the European Commission, the International Monetary Fund and the European Central Bank, known as the Troika.
In this clip, I talk about how setting up an escrow account changes the game:
Under the debt restructuring now being negotiated, holders of Greek debt are being asked to voluntarily swap their existing obligations for new bonds worth about 70 percent less.
Kirkegaard speculates that bailout funds paid into the escrow account would only be available to make interest payments on the new bonds, not the old ones, therefore providing “a powerful incentive to secure a higher participation rate among creditors” in the bond-swap program.
If sufficient money is held in the account, the bond holders would then be assured by the euro area of getting their interest payments, removing the threat of default on the new bonds.
That would change the dynamic between Greece and the Troika. Until now, Greek governments have bet that the Troika has no choice but to pay the next loan tranche, knowing that the risk of contagion from an unstructured Greek default would devastate the entire euro region.
But with an escrow account, if there were Greek resistance to reform, the Troika would be able to use the account to keep holders of Greek bonds happy while keeping back new funds from the Greek government.
The question is, will the Greeks agree to this arrangement? I suspect they have little choice.
Meanwhile, even with an escrow account in place, some analysts say the ECB must erect an even higher firewall to contain the ill effects of Greece’s financial woes. Here’s Kevin Doran, senior fund manager at private bank Brown Shipley & Co. discussing his take on the magnitude of the challenge: