Revised Troika Forecast Sees Total Greek Debt-To-GDP Peaking At 186%: Here Is What Happens Next

Tyler Durden's picture

Back in May 2, 2010, when discussing the first failed Greek bailout (still to be implemented) we made the following observation: "Ignore for a second the sheer lunacy of anyone who thinks that the Greek government can grow GDP and decline the budget deficit in a straight line now that the country will see crippling strikes and rolling riots (not to mention blackouts) on a daily basis. But do note the black line, which shows the projected Debt/GDP ratio for the country as part of the bailout package. In essence Greece will go from having "only" a 133% Debt/GDP ratio to an insane 149% in 2013 before presumably dropping to 144% lower in 2014, still a good 11% higher than currently. Greece just got bailed out so it can get into even more debt! What psychopath of the Keynesian school thinks that this unbelievable trajectory is anything but a complete and utter waste of money? German, and US taxpayers, are merely giving Greece money so it can increase it debtor status with French and a few other European banks. To say that this is a viable solution is something that only those who bow at the altar of Alan Greenspan can do." And so once again, in the endless battle between common sense and Keynesianism, it is former 1 - latter 0, after the Troika yesterday released its revised projections for total Greek debt/GDP, which has just been hiked from 149% to 186% by 2013! Said otherwise, Econ 101 textbook insanity just cost the Greek people roughly half their entire GDP in incremental debt (which they will never be able to repay anyway), however in the process they kept French banks alive and well as a Greek default in May 2010 (the only real option) would have not only destroyed a failed economic monetary union, but blown up the entire French bank system. Fair trade off in that other endless battle, between the 99% and the 1%.

The chart below shows the relentless negative revisions in the Greek catastrophe. The longer a default is delayed, the worse the total debt-to-GDP will be:

And as for reality which is slowly returning, perhaps if Greece and Troika had read the following Citibank report, instead of threatening to sue as we reported, it would have realized that sometimes a calculator is your better friend than lawsuit threats. Recall this piece: "Citi Expects A 76% Haircut On Greek Debt (And 95% If Country Waits 4 Years) For Debt/GDP Ratio Back Down To 60%" which came out months before the July 21 proposal came out with a 21% haircut idea. Obviously the reason why nobody took the 21% haircut seriously at the time, or ever, is that it was a total mockery. Sure enough, it only took the Troika half a year to understand simple math, and even so it still has a way to go. From the just released report: "The results show that debt can be brought to just above120 percent of GDP by end-2020 if 50 percent discounts are applied. Given still-delayed market access, large scale additional official financing requirements would remain, estimated at some €114 billion (under the market access assumptions used). To get the debt down further would require a larger private sector contribution (for instance, to reduce debt below 110 percent of GDP by 2020 would require a face value reduction of at least 60 percent and/or more concessional official sector financing terms). Additional official financing requirements could be reduced to an estimated €109 billion in this instance. Of course, it must be noted that the estimated costs to the official sector exclude any contagion-related costs."

In other words, even the "Ostrich with its head stuck in the sand" known as Europe, finally did the math on both Bailout 1 and Bailout 2 and realized they don't work. But at least it is a start. Of course, between May 2010 and October 2011 the market had countless ramps on expectations that the "Bailout would work", confirming yet again that the market is now completely irrational, inefficient and broken. But we all knew that...

Alas, as we have reported, having actually done the math, the EFSF plan will also fail. But it will take Europe, the Troika and the market about 16 months to fully comprehend that. In the meantime we will see ever more violent rallies and plunges as the market's optimistic cognitive bias, and its recurring clashes with mathematics, come into full view, over and over.

Next Steps

And now that even France appears ready to admit defeat and accept a 50% haircut on Greek debt, here is what happens next. Every PIIGS country in Europe will demand the same treatment: in fact we expect Ireland and Portugal, followed shortly by Italy and Spain, to pull a Greece and report worse economic data than actual, just to attract the bond vigilantes attention, have their spreads blow out, becoming the next Greece in the process and getting a "half off debt" blue light special. In fact, the faster the better, as there will likely not be enough firepower for the last of the 5 PIIGS. Of course, by then French banks will be thoroughly undercapitalized, needing well more than E100 billion of the allotted capital, and France will long have been downgraded from AAA, forcing the EFSF to be the sole burden of Germany, which will have to pledge anywhere between half and 133% of its GDP, to keep the EUR and Europe solvent. Good luck with that.

But yes, there will be a short and sweet rally in the EURUSD... Until the reality predicted above once again defeats all the temporary insanity that is now the only upside catalyst of modern 'capital markets'.

Full Troika revised admission of failure below: