Σάββατο, Φεβρουαρίου 11, 2012
For Greece this is only be the beginning
OK, so here’s the good news: Greece has moved one step further away from a chaotic default. Greece’s political parties have reached a preliminary deal on a slew of austerity measures after weeks of huffing and puffing – and posturing – between the members of the Greek ‘unity’ government, though Greece's far-Right party has said it may now withdraw its support of the package, which could create fresh problems.
Here’s the bad news: Greece may well suffer a full default anyway – at least eventually.
In a sign of just how long the road ahead is for Greece (and the eurozone), only hours after politicians in Athens had agreed the additional measures, eurozone Finance Ministers dampened any temporary optimism, demanding even more. Athens now has to provide the details of how they intend to fill a budget gap of €300+ million, pass the new austerity package through a deeply divided parliament and submit written guarantees that it will actually implement the measures – all by next week. Only then will the IMF and EU get the cover needed (the code is "debt sustainability") to sign off on a fresh €130bn bailout package, meaning Greece will be able to write down part of its debt and narrowly avoid hitting the iceberg this time around.
In addition, a range of other issues still need to be hammered out before the Greeks can actually get the money, including when the restructuring will begin (in time to pay off the €14.4bn in debt maturing on 20 March?),whether the ECB will take losses in any form, whether parliaments around Europe (those that have a vote) will actually approve the second bailout. But still, yesterday’s deal removed a major roadblock – and despite the posturing, Greece will probably get its second bailout.
However, even so, the bigger picture still looks bleak. As widely acknowledged by now, the second bailout package still rests on some herculean – and unrealistic – assumptions about Greece’s ability to cope with years of pretty brutal austerity. The Greek economy is expected to contract by 4-5% this year. And as Ambrose flagged up yesterday, there are a slew of scary stats showing how the Greek economy is sinking ever deeper into recession (manufacturing output is contracting, industrial output is falling, unemployment is jumping etc etc).
And yet, under the assumptions underpinning the second bailout package, Greece is expected to magically return to growth in 2013. Debt and growth are, of course, inexorably linkeed. You cannot address the former without the latter. And Greece’s debt reduction under this bailout package is actually very small, leaving its debt burden hovering above 140% of GDP this year and interest payments on debt eating up a large amount of government spending.
What’s more, even if all the targets laid down by the EU/ECB/IMF troika are met – which is unlikely – Greece would still have a 120% debt to GDP ratio in 2020. So even in the most optimistic scenario, Greece will, in eight years’ time, essentially be where Italy is now. This is to say that, even though there's still a lot of scope to muddle through, even with the additional bailout package and the debt write-down currently being discussed, Greece is on course to a proper, and full, default within the next few years. And make no mistake, the bill for such a default would overwhelmingly be footed by European taxpayers, as a very large share of Greece’s debt will by then be held by European taxpayers (via the ECB, the eurozone bailout fund, the EFSF, and the IMF). The political fall-out could be huge.
Consolidating budgets around Europe is vital, but no one can live on austerity alone. It would be far better to have Greece go through a full default now – say, a 70% write-down – and then focus efforts much more on restoring growth in that country. Though questions over Greece’s ability to compete inside the eurozone would linger, it would at least give Athens a fair chance to try to bounce back.
Unfortunately, Europe could now end up learning this the hard way.