It’s a “historic day” for Greece, according to Lucas Papademos, as Europe’s finance ministers have finally agreed a second massive cash injection for his ailing economy. In return for yet more budget cutting and even closer supervision, Greece gets €130bn. It’s enough to keep them in the Euro and avoid default.
According to Jean Claude Juncker of Luxembourg, “this new programme provides a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing.”
That’s the official line, given to reassure ‘the markets’. The ‘true experience’, to borrow the Greek Tourist Board’s erstwhile slogan, is a little different. Behind closed doors, everyone knows this isn’t enough to save Greece, and the IMF, EU and the European Central Bank more or less say so in a document that was leaked last week. The paper, called Greece: Preliminary Debt Sustainability Analysis, lays out the assumptions behind the deal.
For example, the plan assumes the following growth pattern for the Greek economy:
- 2012 -after last year’s 6% contraction, the economy shrinks by a slightly lower 4.3%
- 2013 – economy levels out at 0.0% growth
- 2014 – growth returns at 2.3%
- 2015 – growth now surging ahead at 2.9%
- 2015 – 2030 growth continues, averaging 2.2% a year
For an economy that’s been shrinking since 2008, that’s a pretty big ask. Factor in more budget cutting to come, serious social unrest and a Europe-wide recession and those growth ambitions look pretty desperate. Where exactly, is that growth going to come from? The document acknowledges that more cuts will make debt-to-GDP ratios worse in the short term, that more debt relief and financial support will be needed, and that the whole process is “accident-prone” and has “questions about sustainability hanging over it”.
Indeed, and in a global context, it starts to look even worse. Those levels of growth have to be consistent for a decade and a half, regardless of all the other challenges that those years in store. The economy has to grow at an average of 2.2%, whatever happens to the oil price, food prices, the climate or the fragile global banking system.
And then there’s the thorny issue of local politics, because fixing the Greek economy is not going to be quick. Debt targets won’t be achieved until the late 2020s, and an entire generation will come of age in a country that is not sovereign over its own finances. What will that mean for Greek business, politics and democracy?
The document skirts around these issues in its language, the detached code of economics: “Greater wage flexibility may in practice be resisted by economic agents” it warns. Translation: there’s only so far you can cut people’s salaries before they start rioting. The Greek people are being talked about in the abstract, and the IMF’s maths is likely to unravel on the streets of Athens.
Last night’s bailout doesn’t solve the problem, and everybody knows it. It only forestalls the default by a few more months, and saves the Eurozone the embarrassment of having to expel one of its members. There is a much more pressing question that the international community needs to address – there needs to be a formal procedure for countries to declare themselves bankrupt.
The Earthbound Report 
“There is a much more pressing question that the international community needs to address – there needs to be a formal procedure for countries to declare themselves bankrupt.”
EXACTLY! Plus the creditors please have to carry their own risks. THEY decided to lend the money in the first place. But I keep wondering about something else: the US of A have a per capita public debt exceeding that of Greece by roughly 10.000 US$. If we look at the Eurozone at large it looks much better. So why are Eurozone countries “rated down” while the US of A continue to ride the AAA surf? Where is the logic behind that? The US are no more able to repay their debt than Greece.
I suspect it’s because the dollar is the international reserve currency of choice, which means the US can basically print money to pay off its own debts, and it can therefore (theoretically) borrow infinitely. There’s been a huge appetite for US Treasury Bills, and there are too many out there now for anyone to risk questioning the wisdom of it all.
I should write a post about T-bills. They’re a pretty unique phenomenon in the global economy.
If you write about T-bills, maybe combine it with some insight on credit default swaps? It is all rather peculiar – and entirely artificial. An entirely man made crisis.