“The EU, led by France and Germany, appears to have some sort of financing package in the works for Greece (probably still without a major role for the IMF). But the main goal seems to be to buy time – hoping for better global outcomes – rather than dealing with the issues at any more fundamental level.
Greece needs 30-35bn euros to cover its funding needs for the rest of this year. But under their current fiscal plan, we are looking at something like 60bn euros in refinancing per year over the next several years – taking their debt level to 150 percent of GDP; hardly a sustainable medium-term fiscal framework.
A fully credible package would need around 200bn euros, to cover three years. But the moral hazard involved in such a deal would be immense – there is no way the German government can sell that to voters (or find that much money through an off-government balance sheet operation).
Alternatively, of course, the Greeks could make much more dramatic cuts to their primary deficit – the government budget balance if you take out interest payments – in order to stabilize their debt-GDP ratio.
But with no significant resurgence of growth in the eurozone coming for a long time, that would really mean moving from last year’s 7.7% GDP primary deficit to around a 6% GDP primary surplus (assuming they face a real interest rate of 5%, i.e., below what they are paying today).
The government won’t (or can’t?) do that. In 2009 Greek wages and pensions rose by 10.5% – an amazing spending spree. In the 2010 budget they are forecast to rise by 0.3%. Where is the austerity? No wonder the prime minister is popular – they aren’t really cutting much.
The bailout package is really just an opportunity for European banks to get out of Greek debt. The Greeks can’t really collapse until they lose access to funding, so the hope is that this prevents the problems from spreading – and the prospects of such a “rescue” will keep bond yields down for Portugal, Spain, and others.
Our baseline view is that Greece enters into quite a bad recession this year, their banks and corporates continue to have trouble raising financing – thus causing broader liquidity issues, and it all comes to a head again as we near the time the government needs to take ever harsher measures next year, when there is again no bilateral funding in place.
This is the new Greek cycle.”
Peter Boone and Simon Johnson, “An Underfunded Program For Greece”, The Baseline Scenario (1 March 2010).
http://baselinescenario.com/2010/03/01/an-underfunded-program-for-greece/#more-6619
Despite all the talk, I for one do not believe in the end the Germans will bail out the Greeks. Could be wrong, but I think the EU is stringing along the Greeks in hopes that somehow something will happen that will avert disaster. Perhaps the EU (that is, the Germans) might offer something should things get out of control with very bad and prolonged riots, but it will be peanuts compared to the problem and given only to calm the moment. In my view, the only hope the Greeks really have is the IMF, and I don’t think the IMF will help them any time soon. My prediction is drift in policy and drips of aid this year, with the real reckoning coming next year when Greece is forced out off the euro.
The reason I hold this view is that whatever Germany does for Greece it must do for Spain, Portugal and the other weak countries of Europe. It cannot afford to go down this road. So Greece will have to undertake the adjustment more or less on its own or with minimal support from the outside. Because immediately implementing a full-scale austerity program in Greece to establish competitiveness with the outside world would be extremely painful, it will have to be introduced over time. Hence, some program of minimal support allowing a difficult 2010 to become an even more difficult 2011 may be in the cards. If an EU program actually emerges I would expect it to be financed through the IMF, with just enough financing to survive 2010.
The root problem before Greece and the rest of Europe is demographic, not economic. Greece’s entitlement state with its huge public sector is not close to sustainable when the fertility rate is 1.3 children per woman and declining. Workers in Greece can retire at 58 and these workers, like those in the U.S. and elsewhere, have no intention of giving up their benefits, even if it bankrupts the state, which of course it already has. Greece has now run out of Greeks, and the remaining Greeks are looking to the EU (read the Germans) to support their welfare state in the style to which they have become accustom.
Germans, who have their own demographic problems and must work until 67, will never agree to supporting current income levels of countries with the level and increases in benefits available to Greeks. So reality is coming to Greece, sooner than they expected. The question is whether the contractionary policies that are on their way, not only in Greece but in Spain and Portugal and the other overextended states completely upset the economic and political stability of Europe. Expect large-scale emigration out of Greece and these other countries as the economic deteriorates with little prospect of recovery.
Similar imbalances describe the fiscal accounts of the U.S. and the U.K. and other large countries. Nothing is being done to address these problems, indeed, current policy efforts only aggravate them. Greece, in a sense, is a prelude to what is to come here if present policy continues and the Administration refuses to focus on jobs and the deficit.
While Greeks can run to the U.S. to escape a collapsing economy, where will the Americans run to?
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