Column : Who is this bailout really for?

On May 3, Euro-region ministers agreed to a 110-billion euro rescue package for Greece to prevent a default and stop the worst crisis in the currency?s 11-year history from spreading through the rest of the Euro bloc. Something had to be done because Greece?s next bond payback date is May 19 and a possible failure to pay would have, at the very least, routed other European sovereign bond markets and sent stock markets tumbling in the region. Last week?s market sellout of Portuguese and Spanish bonds on speculation that a bailout package may not come through, was enough indication for policy makers to agree to the unprecedented bailout. The 16-nation bloc will pitch in 80 billion euros and the IMF will contribute the rest 30 billion euros. Greece agreed to a series of fiscal measures that would help repay this borrowing. At stake is the future of the euro, 11 years after its creators left control of fiscal policy in national capitals.

On the face of it, it seems like the EU has been generous with Greece in lending money to a country that has overspent itself in the past. The dole-out isn?t as much because of a new found love of their neighbour, but because by helping Greece they are, at least in part, bailing their banks out of immediate trouble. Sure, Euro politicians may sell it to their citizens that they are helping out Greece to look like a US of Europe but in actuality, their compulsion comes from preventing any adverse stress to their own banking institutions. Unlike the Japanese government that borrows money from its own citizens, Greek domestic savings aren?t anywhere close to those levels. More than 80% of the bonds issued by the Hellenic Republic are held by European banks in other European countries. If the Greek government had chosen to default because of being left with no other choice, then the major losers would not have been its own citizens but the other European banks that are holding those bonds. Sure, it would have blotted Greece?s credit history irreparably, but it wouldn?t have been politically unpalatable.

So, effectively what you are seeing is its neighbours helping Greece remain solvent and being able to pay back the money it had borrowed in the past.

The financial lifeline lasts three years. The 110-billion euro fund will be disbursed in tranches with quarterly assessments and a permanent IMF team monitoring its progress on a monthly basis. This deal will lend Greece sufficient money so that it doesn?t have to borrow for at least three years from the financial markets (other banks who hold the bonds). Policy makers are hoping that three to four years is enough time for Greece to put its fiscal house in order and become financially sound. To get to that position, the Greek government needs to demonstrate that it can find its way back to supportable levels of debt, which the EU specifies as less than 60% of GDP. Greece?s debt-to-GDP ratio is currently 140% and exceeds the EU specifications by 80%. The bailout forces Greece to cut its budget deficit?i.e. the shortfall of revenues over spending to less than 3% of GDP by the end of 2014. The shortfall was 13.6% last year. It needs to show that it can not only service the interest on this borrowing but can also retire debt worth 80% of GDP in three to four years. Meanwhile, it has to get its economy into a position where it can realistically be expected to grow healthily.

Will Greece implement these fiscal measures well enough and does it have the political will to do so? Greece no longer makes anything that anyone outside Greece wants to buy at the price Greeks demand. It has one of the lowest labour productivity per person employed. It seems overly optimistic to think that all of a sudden Greek workers are going to chuck their unproductive habits and start to work a lot more efficiently just because the government has agreed to a series of measures. This seems more unlikely because wages are slated to come down in the future from current levels.

The magnitude of the fiscal measures is quite onerous and it may choke Greece?s economic growth to the detriment of its citizens and the lenders. These measures may help Greece service the debt short-term; however, this will hurt long-term GDP growth needed to get the country back to economic health. Unlike the current generation in India is reaping the benefits of economic growth, a generation in Greece may have to bear the pain of past profligacy. This bailout is, at best, a short-term fix and doesn?t mean the end of woes for either Greece or its lenders.

This is not the last time that Greece is coming hat in hand to the rest of the world.

The author, formerly with JPMorganChase, is CEO, Quantum Phinance