Latest Greek bailout proposals – can another crisis be averted?

The dust has barely settled on the rancorous "agreement" reached some three weeks ago between the Greek government and its European creditors and the International Monetary Fund. Greek prime minister Alexis Tsipras has since succeeded, despite major internal opposition, in passing an unprecedentedly wide raft of reform legislation demanded by the troika. However, the road ahead is very rocky.

Detailed negotiations on a new bailout programme are under way (this time, at creditors’ insistence, in Athens). Reaching an accord will only mark the beginning of another chapter in the long drawn-out Greek saga. Any agreement will probably entail frequent interruptions, triggered by shortfalls in programme implementation .

The chances of a new programme succeeding will depend primarily on the degree of support the Greek government can muster domestically. However, if the previous failures are not to be repeated, there are clear lessons from recent experience to be taken on board by both sides, including as in regard to respective negotiating substances and styles.

First, European politicians need to continue to make quite clear they are willing to accommodate a Grexit. Earlier statements such as that by Angela Merkel to the effect that any break-up of the euro would be a "failure for Europe" helped create the impression that European support for Greece would be maintained at virtually any cost. The Greek side only began to negotiate seriously when European leaders finally said what they meant and meant what they said.

Reform programme

Second, creditors should be explicit from the outset a write-down of the massive Greek sovereign debt (now primarily owed to European governments) will take place if the agreed-upon reform programme is sustained. No serious analyst expects this debt will end up being repaid at anything near to its full value, as recently publicly acknowledged (somewhat belatedly) by IMF managing director

Christine Lagarde

.

Creditors agreed earlier to consider further improvements in what are already highly favourable terms. However, Germany and other reluctant creditor countries need to recognise there is no economic or financial difference between lowering the interest rate and/or further extending the maturities and an equivalent cut in the nominal value of the debt.

Politically, within Greece, some actual reduction in the value of the debt can provide a “victory” of sorts for the Tsipras government and help it to assuage its critics. Moreover, this would remove a contentious issue. A continuous focus on the debt controversy allowed the Greek side to avoid confronting the real issue, namely, addressing distortions that have held back growth in Greece for years.

As in other debt negotiations, attempts to apportion “moral blame” to the debtor or the creditor should be replaced by a pragmatic approach aimed at achieving the best negotiated outcome for all involved. Concerns about setting precedents are exaggerated – given Greece’s situation, would any other euro area countries really be tempted to follow their example?

Confrontational approach

It is to be hoped the Greek side has also learned some painful lessons. First, appeals for support from European partners for their confrontational approach have fallen flat. This is not only because of fears by other countries that a Tsipras success would provide ammunition to left-wing critics. Other debt-stressed countries that did not follow the Tsipras route have recently started to show a significant turnaround, including in

Ireland

where gross domestic product has returned to pre- crisis 2007 levels and the debt burden is starting to appear more sustainable.

Second, the Tsipras government should continue to emphasisethat remaining within the euro area requires many painful structural reforms. The earlier failure to convey this reality to the Greek citizenry – for which Europe shares some blame – was the source of much of the recent negotiating debacle.

Finally, although perhaps too much to expect, both sides should do their utmost to avoid negotiating in public. Various aggressive (and inflammatory) statements, including a cacophony of voices on the European side, were highly counterproductive. Successful negotiations require compromises to achieve mutually beneficial, albeit less than optimal, outcomes. Adopting “hard line” positions publicly often increases greatly the perceived costs associated with such compromises.

It is much too early to say whether a new Greek programme will succeed. The negotiations undoubtedly left wounds on all sides, and establishing mutual trust and confidence will not be easy. However, all involved should reflect on what went so wrong in the past six months. Learning lessons from this bruising experience could increase the chances of a positive result.

Donal Donovan is a former deputy director at the IMF. He is joint author, with Antoin E Murphy, of The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis (Oxford, 2014)